Back to GetFilings.com
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-19281
THE AES CORPORATION
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 54-1163725
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1001 NORTH 19TH STREET, ARLINGTON, VIRGINIA 22209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 522-1315
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
$2.6875 Term Convertible Securities, Series A New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Warrants to Purchase Common Stock,
par value $.01 per share NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---------------
The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at March 2, 2000, was $13,584,103,262. The
number of shares outstanding of Registrant's Common Stock, par value $0.01
per share, at March 2, 2000, was 207,234,949.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 18, 2000 is hereby incorporated by reference.
Certain information therein is incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
OVERVIEW
The AES Corporation and its subsidiaries and affiliates (collectively
"AES" or the "Company") are a global power company committed to serving the
world's needs for electricity in a socially responsible way. AES's electricity
"generation" business consists of sales to wholesale customers (generally
electric utilities, regional electric companies or wholesale commodity markets
known as "power pools") for further resale to end users. AES also sells
electricity directly to end users such as commercial, industrial, governmental
and residential customers through its "distribution" business.
In its generation business, AES now operates and owns (entirely or in
part) a diverse portfolio of electric power plants (including those within the
integrated distribution companies discussed below) with a total capacity of
36,675 megawatts (MW). Of that total, 33% are fueled by coal or petroleum coke,
18% are fueled by natural gas, 15% are hydroelectric facilities, 4% are fueled
by oil, and the remaining 30% are capable of using multiple fossil fuels. Of the
total MW, 7,606 (eighteen plants) are located in the United States, 754 (seven
plants) are in China, 1,281 (three plants) are in Hungary, 9,106 (fifty-one
plants) are in Brazil, 5,763 (six plants) are in the UK, 885 (six plants) are in
Argentina, 7,909 (seven plants) are in Kazakhstan (including 4,000 MW
attributable to Ekibastuz which currently has a reliable capacity of
approximately 22%), 210 (one plant) are in the Dominican Republic, 110 (one
plant) are in Canada, 695 (two plants) are in Pakistan, 405 (one plant) are in
the Netherlands, 1,254 (three plants) are in Australia, 420 (one plant) are in
India, 277 (four plants) are in Panama.
AES has majority ownership in three distribution companies in Argentina
and individual distribution companies in the United States, Brazil, El Salvador,
Dominican Republic, and The Republic of Georgia. The Company also has assumed
management control of a heat and electricity distribution business in
Kazakhstan. In addition the Company has less than majority ownership in three
additional distribution companies in Brazil and one in India. These distribution
companies serve a total of over 15 million customers with annual sales exceeding
109,000 gigawatt hours. On a net equity basis, AES's ownership represents
approximately 5.4 million customers and annual sales exceeding over 24,000
gigawatt hours. The Company also has three subsidiaries in the United States
that serve retail customers in those states that have introduced a competitive
market for the sale of electricity to end users.
AES is also currently in the process of adding approximately 6,646 MW
to its operating portfolio through its construction of new plants (known as
"greenfield" development). These include a 454 MW natural gas-fired plant, a 705
MW natural gas-fired plant, and a 180 MW coal-fired plant in the United States,
a 600 MW natural gas-
fired plant in Brazil, a 2,100 MW coal-fired plant in China, an 830 MW
natural gas-fired plant and a 123 MW hydroelectric facility in Argentina, a
refurbished 360 MW coal-fired plant in England, two natural gas fired plants
totaling 810 MW in Bangladesh and a 484 MW natural gas-fired plant in Mexico.
In addition, a Brazilian subsidiary, Eletronet, is in the process of
constructing a national broadband telecommunications network attached to the
existing national transmission grid in Brazil.
As a result, AES's total MW of the 122 power plants in operation or
under construction is approximately 43,321 MW and net equity ownership (total
MW adjusted for the Company's ownership percentage) represents approximately
31,751 MW.
AES considers continually acquisition opportunities, including
significant acquisition opportunities throughout the world. The Company has
been actively involved in the acquisition and operation of electricity assets
in countries that are restructuring and deregulating the electricity
industry. Some of these acquisitions have been made from other electricity
companies that are exiting the electricity generation business. In these
situations, sellers generally seek to complete competitive solicitations in
less than one year, which is much faster than the time incurred to complete
greenfield developments, and require payment in full on transfer. The Company
also actively considers acquisition opportunities in non-competitive bidding
situations, including unsolicited acquisition proposals. AES believes that
its experience in competitive markets and its worldwide integrated group
structure (with its significant geographic coverage and presence) enable it
to react quickly and creatively in such situations.
The Company, a corporation organized under the laws of Delaware, was
formed in 1981. AES has its principal offices located at 1001 North 19th
Street, Suite 2000, Arlington, Virginia 22209. Its telephone number is (703)
522-1315, and its web address is http://www.aesc.com.
CAUTIONARY STATEMENTS AND RISK FACTORS
The Company wishes to caution readers that the following important
factors, among others, indicate areas affecting the Company which involve
risk and uncertainty. These factors should be considered when reviewing the
Company's business, and are relied upon by AES in issuing any forward-looking
statements. Such factors could affect AES's actual results and cause such
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, AES. Some or all of these factors may
apply to the Company's businesses as currently maintained or to be maintained.
- Changes in company-wide operation and availability of the plants
(including wholly and partially owned facilities) compared to the
Company's historical performance; changes in the Company's
historical operating cost structure, including but not
limited to those costs associated with fuel, operations, supplies,
raw materials, maintenance and repair, people, purchase and
transmission of electricity and insurance.
- In certain non-U.S. countries where the Company is or is seeking to
conduct business: unexpected changes (or lack thereof) in
electricity tariff rates or tariff adjustments for increased
expenses; the ability or inability of AES to obtain, or hedge
against, foreign currency; foreign exchange rates and fluctuations
in those rates; the economic, political and military conditions
affecting property damage, interruption of business and
expropriation risks; changes in trade, monetary and fiscal
policies, laws and regulations; other activities of governments,
agencies and similar organizations; social and economic conditions;
local inflation and monetary fluctuations; import and other charges
or taxes; conditions or restrictions impairing repatriation of
earnings or other cash flow; nationalizations and unstable
governments and legal systems, and intergovernmental disputes.
- In certain jurisdictions where the Company's electricity tariffs
are subject to regulatory review or approval, changes in the
application or interpretation of regulatory provisions including,
but not limited to, changes in the determination, definition or
classification of costs to be included as reimbursable or pass
through costs, changes in the definition or determination of
controllable or non-controllable costs, changes in the definition
of events which may or may not qualify as changes in economic
equilibrium, changes in the timing of tariff increases or other
changes in the regulatory determinations under the relevant
concessions, state or federal regulatory provisions.
- Changes in the amount of, and rate of growth in, AES's selling,
general and administrative expenses; the impact of AES's ongoing
evaluation of its development costs, business strategies and asset
valuations, including, but not limited to, the effect of a failure to
successfully complete certain development projects.
- The inability to raise capital on favorable terms to refinance
existing short-term project indebtedness or to fund future
acquisitions and other capital commitments.
- Legislation intended to promote competition in U.S. and non-U.S.
electricity markets, such as: (i) The New Energy Trading
Arrangements (NETA) currently proposed in the United Kingdom to
replace the current electricity pool structure; (ii) legislation
currently receiving serious consideration in the United States
Congress to repeal (a) the Public Utility Regulatory Policies Act
of 1978, as amended, or at least to repeal the obligation of
utilities to purchase electricity from qualifying facilities, and
(b) the Public Utility Holding Company Act of 1935, as amended;
(iii) changes in regulatory rule-making by the Federal Energy
Regulatory Commission or other regulatory bodies; (iv) changes in
energy taxes; (v) new legislative or regulatory initiatives in
non-U.S. countries; (vi) changes in national, state or local
energy, environmental, safety, tax and other laws and regulations
applicable to the Company or its operations.
- The prolonged failure by any customer of the Company or any of its
subsidiaries to fulfill its contractual payment obligations presently
or in the future, either because such customer is financially unable
to fulfill such contractual obligation or otherwise refuses to do so.
- Successful and timely completion of (i) the respective construction
for each of the Company's electric generating projects now under
construction and those projects yet-to-begin construction or (ii)
capital improvements to its existing facilities.
- Changes in inflation, fuel, electricity and other commodity prices in
U.S. and non-U.S. markets; conditions in financial markets, including
fluctuations in interest rates and the availability of capital; and
changes in the economic and electricity consumption growth rates in
U.S. and non-U.S. countries.
- Adverse weather conditions and the specific needs of each plant to
perform unanticipated facility maintenance or repairs or outages
(including annual or multi-year).
- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims (including
insurance claims for losses suffered), and changes in those items,
developments or assertions by or against AES; the effect of new, or
changes in, accounting policies and practices and the application
of such policies and practices.
- Changes or increases in taxes on property, plant, equipment,
emissions, gross receipts, income or other aspects of the Company's
business or operations.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates in two business segments: generation and
distribution. See Note 15 to the Consolidated Financial Statements included
in Item 8 herein for financial information about those segments.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company attempts to participate in competitive power markets
through either greenfield development or by acquiring and operating existing
facilities. The Company operates electric generating facilities that utilize
natural gas, coal, oil, hydropower, or combinations thereof. In addition, the
Company participates in the electricity distribution business and will
continue to review opportunities in such markets in the future. Other
elements of the Company's strategy include:
- Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
- Constructing or acquiring projects of a relatively large size;
- When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
- Where possible, participating in distribution and supply markets that
grant concessions with long-term pricing arrangements.
The Company also strives for operating excellence as a key element of
its strategy, which it believes it accomplishes by minimizing organizational
layers and maximizing company-wide participation in decision-making. AES has
attempted to create an operating environment that results in safe, clean and
reliable electricity generation and distribution. Because of this emphasis, the
Company prefers to operate all facilities which it develops or acquires;
however, there can be no assurance that the Company will have operating control
of all of its facilities.
The Company's focus is the wholesale generation and retail distribution
of electricity. References to power sales agreements, fuel supply agreements and
plants generally mean those related to the generation business. Concession (or
service) contracts, supply contracts and networks are generally associated with
the distribution businesses.
Traditionally, most of AES's generation plants have sold electricity
under long-
term power sales agreements to electric utilities or state-owned power
companies. Generated electricity is sold under a two part pricing method,
representing the two main products, capacity and energy, produced by electric
generating facilities. Energy refers to the sale of the actual electricity
produced by the plant and capacity refers to the amount of generation
reserved for a particular customer, irrespective of the amount of energy
actually purchased. Most of the Company's generating businesses (based upon
revenues) are structured so that each power plant generally relies on one
power sales contract with a single electric customer for the majority, if not
all, of its revenues. At some generation plants, all or a portion of the
electricity sales are not sold pursuant to a long-term contract and are sold
into the short-term contract or spot electricity markets. The prices paid for
electricity in the spot markets can be, and from time to time, have been
unpredictable and volatile.
To the extent possible, the Company attempts to structure a
generation plant's fuel supply contract so that fuel costs are indexed in a
manner similar to the energy payments a project receives under the power sales
contract. In this way, project revenues are partially hedged against
fluctuations in fuel costs.
As with fuel prices, AES has hedged a substantial portion of its
projects against the risk of fluctuations in interest rates. In each project
with fixed capacity payments, AES has attempted to hedge all or a significant
portion of its risk of interest rate fluctuations by arranging for fixed-rate
financing or variable-rate financing with interest rate swaps or other hedging
mechanisms. Those projects with fluctuating capacity payments are hedged by
arranging for floating rate financing.
The Company attempts to finance each domestic and foreign project
primarily under loan agreements and related documents which, except as noted
below, require the loans to be repaid solely from the project's revenues and
provide that the repayment of the loans (and interest thereon) is secured
solely by the capital stock, physical assets, contracts and cash flow of that
project subsidiary or affiliate. This type of financing is usually referred
to as "project financing." The lenders under these project financing
structures generally cannot look to AES or its other projects for repayment,
unless such entity explicitly agrees to undertake liability. AES has
explicitly agreed to undertake certain limited obligations and contingent
liabilities, most of which by their terms will only be effective or will be
terminated upon the occurrence of future events. These obligations and
liabilities take the form of guarantees, indemnities, letter of credit
reimbursement agreements, and agreements to pay, in certain circumstances, to
project lenders or other parties. To the extent AES becomes liable under
guarantees and letter of credit reimbursement agreements, distributions
received by AES from other projects are subject to the possibility of being
utilized by AES to satisfy these obligations. To the extent of these
obligations, the lenders to a project effectively have recourse to AES and to
the distributions to AES from other projects. The aggregate contractual
liability of AES is, in each case, usually a small portion of the aggregate
project debt, and thus the project financing structures are generally
described herein as being "substantially non-recourse" to AES and its other
projects.
PRINCIPLES AND PRACTICES
A core part of AES's corporate culture is a commitment to "shared
principles." These principles describe how AES people endeavor to behave,
recognizing that they don't always live up to these standards. The principles
are:
INTEGRITY - AES strives to act with integrity, or "wholeness." The
Company seeks to honor its commitments. The goal is that the things AES
people say and do in all parts of the Company should fit together with
truth and consistency.
FAIRNESS - AES wants to treat fairly its people, its customers, its
suppliers, its stockholders, governments and the communities in which
it operates. Defining what is fair is often difficult, but the Company
believes it is helpful to routinely question the relative fairness of
alternative courses of action.
FUN - AES desires that people employed by the Company and those people
with whom the Company interacts have fun in their work. AES's goal has
been to create and maintain an environment in which each person can
flourish in the use of her or his gifts and skills and thereby enjoy
the time spent at AES.
SOCIAL RESPONSIBILITY - The Company believes that it has a
responsibility to be involved in projects that provide social benefits,
such as lower costs to customers, a high degree of safety and
reliability, increased employment and a cleaner environment.
AES recognizes that most companies have standards and ethics by which
they operate and that business decisions are based, at least in part, on such
principles. The Company believes that an explicit commitment to a particular set
of standards is a useful way to encourage ownership of those values among its
people. While the people at AES acknowledge that they won't always live up to
these standards, they believe that being held accountable to these shared values
will help them behave more consistently with such principles.
AES makes an effort to support these principles in ways that
acknowledge a strong corporate commitment and encourage people to act
accordingly. For example, AES conducts annual surveys, both company-wide and at
each location, designed to measure how well its people are doing in supporting
these principles -- through interactions within the Company and with people
outside the Company. These surveys are perhaps most useful in revealing
failures, and helping to deal with those failures. AES's principles are relevant
because they help explain how AES people approach the Company's business. The
Company seeks to adhere to these principles, not as a means to achieve economic
success but because adherence is a worthwhile goal in and of itself.
In order to create a fun working environment for its people and
implement its strategy of operational excellence, AES has adopted
decentralized organizational principles and practices. For example, AES works
to minimize the number of supervisory layers in its organization. Most of the
Company's plants operate without shift supervisors. The project subsidiaries
are responsible for all major facility-specific business functions, including
financing and capital expenditures. Criteria for hiring new AES people
include a person's willingness to accept responsibility and AES's principles
as well as a person's experience and expertise. The Company has generally
organized itself into multi-skilled teams to develop projects, rather than
forming "staff" groups (such as a human resources department or an
engineering staff) to carry out specialized functions.
AES BUSINESSES
The following tables set forth information regarding the Company's
businesses that are in operation or under construction. For a description of
risk factors and additional factors that may apply to the Company's
businesses, see also the information contained under the caption "Cautionary
Statements and Risk Factors" in Item 1 above, and Item 7, "Discussion and
Analysis of Financial Condition and Results of Operations" herein.
- --------------------------------------------------------------------------------------------------------------
YEAR OF
ACQUISITION OR APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
FACILITIES IN OPERATION FUEL OPERATIONS (MWS) LOCATION (PERCENT)
- --------------------------------------------------------------------------------------------------------------
NORTH AMERICA
Deepwater Pet coke 1986 143 Texas, U.S. 100
Beaver Valley Coal 1987 125 Pennsylvania, U.S. 100
Placerita Gas 1989 120 California, U.S. 100
Thames Coal 1990 181 Connecticut, U.S. 100
Shady Point Coal 1991 320 Oklahoma, U.S. 100
Hawaii Coal 1992 180 Hawaii, U.S. 100
Kingston Gas 1997 110 Canada 50
Alamitos Gas 1998 2,083 California, U.S. 100
Redondo Beach Gas 1998 1,310 California, U.S. 100
Huntington Beach Gas 1998 563 California, U.S. 100
Cayuga Coal 1999 306 New York, U.S. 100
Greenidge Coal 1999 161 New York, U.S. 100
Hickling Multiple 1999 85 New York, U.S. 100
Jennison Coal 1999 71 New York, U.S. 100
Somerset Coal 1999 675 New York, U.S. 100
Westover Coal 1999 126 New York, U.S. 100
Warrior Run Coal 1999 180 Maryland, U.S. 100
Duck Creek Coal 1999 366 Illinois, U.S. 100
Edwards Coal 1999 772 Illinois, U.S. 100
Indian Trails Co-Gen Gas 1999 19 Illinois, U.S. 100
LATIN AMERICA
San Nicolas Multiple 1993 650 Argentina 69
Rio Juramento (2 plants) Hydro 1995 112 Argentina 98
San Juan (2 plants) Hydro/Gas 1996 78 Argentina 98
Light (4 plants) Hydro 1996 788 Brazil 18
CEMIG (37 plants) Hydro 1997 5,668 Brazil 9
Los Mina Oil 1997 210 Dominican Republic 100
Quebrada de Ullum Hydro 1998 45 Argentina 100
EGE Bayano (2 plants) Hydro 1999 192 Panama 49
EGE Chiriqui Hydro 1999 90 Panama 49
Tiete (10 plants) Hydro 1999 2650 Brazil 62
ASIA AND THE PACIFIC
Cili Misty Mountain Hydro 1994 26 China 51
Yangchun Sun Spring Oil 1995 15 China 25
Wuhu Grassy Lake Coal 1996 250 China 25
Ekibastuz Coal 1996 4,000 Kazakhstan 100
Chengdu Lotus City Gas 1997 48 China 35
Altai Power (6 plants) Coal/Hydro 1997 3,909 Kazakhstan 100
Hefei Prosperity Lake Oil 1997 115 China 70
Jiaozuo Aluminum Power Coal 1997 250 China 70
Lal Pir Oil 1997 351 Pakistan 90
Pak Gen Oil 1998 344 Pakistan 90
Aixi Heart River Coal 1998 50 China 70
OPGC Thermal 1998 420 India 49
Mt. Stuart Kerosene 1999 288 Australia 100
Yarra Gas 1999 500 Victoria 100
Jeeralong Gas 1999 466 Australia 100
EUROPE
Kilroot (NIGEN) Coal/Oil 1992 520 United Kingdom 47
Belfast West (NIGEN) Coal 1992 120 United Kingdom 47
Medway Gas 1995 688 United Kingdom 25
Borsod Coal 1996 171 Hungary 100
Tisza II Oil/Gas 1996 860 Hungary 100
Tiszapalkonya Coal 1996 250 Hungary 100
Indian Queens Oil 1997 140 United Kingdom 100
Elsta Gas 1998 405 Netherlands 50
Barry Gas 1998 230 United Kingdom 100
Drax Coal 1999 4,065 United Kingdom 100
- ---- ---- ---- ------ -------------- ---
TOTALS 36,675
- -----------------------------------------------------------------------------------------------------------------
PROJECTED YEAR OF APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION FACILITIES OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
UNDER CONSTRUCTION FUEL OPERATIONS* (MWS) LOCATION (PERCENT)
- -----------------------------------------------------------------------------------------------------------------
l
Yangcheng Sun City Coal 2000 2,200 China 25
Uruguaiana Gas 2000 600 Brazil 100
Merida III Gas 2000 484 Mexico 55
Fifoots Point Coal 2000 360 U.K. 100
Parana Gas 2001 830 Argentina 67
Haripur Gas 2001 360 Bangladesh 100
Maghnaghat Gas 2001 450 Bangladesh 100
Ironwood Gas 2002 705 Pennsylvania, U.S. 100
Caracoles Hydro 2002 123 Argentina 100
Puerto Rico Coal 2002 454 Puerto Rico, U.S. 100
Warrior Run Coal 2000 180 Maryland, U.S. 100
- ------- --- ---- ----- ---------- ---
TOTALS 6,646
* Dates for commencement of commercial operation are projections only and
may be subject to change.
- --------------------------------------------------------------------------------------------------------------------------
APPROXIMATE NUMBER AES EQUITY
YEAR OF OF APPROXIMATE GEOGRAPHIC INTEREST
DISTRIBUTION FACILITIES ACQUISITION CUSTOMERS SERVED GIGAWATT HOURS LOCATION (PERCENT)
- --------------------------------------------------------------------------------------------------------------------------
Light 1996 2,800,000 19,981 Rio de Janeiro, Brazil 18
EDEN 1997 270,000 3,572 Buenos Aires, Argentina 60
EDES 1997 129,000 1,182 Buenos Aires, Argentina 60
CEMIG 1997 4,680,000 32,179 Minas Gerais, Brazil 9
Tau Power/Altai 1997 150,000 2,000 Kazakhstan 70
Sul 1997 900,000 6,500 Rio Grande do Sul, Brazil 96
CLESA 1998 206,000 530 Santa Ana, El Salvador 64
Eletropaulo 1998 4,319,000 34,789 Sao Paulo, Brazil 10
EDELAP 1998 506,000 2,000 Buenos Aires, Argentina 60
Telasi 1998 370,000 2,200 Tbilisi, Georgia 75
CILCO 1999 193,000 6,000 Illinois, U.S. 100
EDE ESTE 1999 400,000 2,990 Dom. Republic 50
East Kazakhstan and Semipalatinsk 1999 470,000 2,572 Kazakstan NA
CESCO 1999 600,000 2,102 India 48
- ----- ---- ------- -------------- ---
TOTALS 15,993,000 118,597
REGULATORY OUTLOOK
In the year 2000, regulation affecting AES's electricity generation
and distribution businesses worldwide remains in transition: generally the
trend is towards more competition and less regulation, but both the timing of
the transition and the regulatory rules vary greatly amount countries and
regimes.
The United States is a good example of this regulatory "patchwork
quilt." In the last 5 years, several states have passed legislation that
allows electricity customers to choose their electricity supplier in a
competitive electricity market (so-called "retail access" or "customer
choice" laws), and all but two of the remaining states are considering such
legislation. While such "customer choice" plans differ in detail, they
usually share important elements: (1) they allow customers to choose their
electricity suppliers by a certain date (the dates in the existing or
proposed legislation vary between 1998 and 2003); (2) they allow utilities to
recover so-called "stranded costs"--the remaining costs of uneconomic
generating or regulatory assets; and (3) they reaffirm the validity of
existing Qualifying Facility ("QF") contracts, and make provisions to assure
payment over the contract life.
In addition to state restructuring legislation, some members of
Congress have proposed new Federal legislation to encourage customer choice
and recovery of stranded assets. Some argue that Federal legislation is
needed to avoid the "patchwork" effect of each state acting separately to
pass restructuring legislation; others argue that each state should decide
whether to allow retail choice. Several bills have been (and others are
expected to be) submitted to Congress on electricity restructuring. Currently
most of these bills focus on competitive wholesale markets; retail
legislation is currently being left to the states to decide. While it is
uncertain whether or when any Federal legislation dealing with electricity
restructuring might be passed, it is the opinion of the Company that such
legislation would not have a materially adverse effect on the Company's U.S.
business.
In anticipation of restructuring legislation, many U.S. utilities
are seeking ways to lower their costs in order to become more competitive.
These include the costs that utilities are required to pay under QF
contracts, which the utilities may view as excessive when compared to current
market prices. Many utilities are therefore seeking ways to lower these
contract prices by renegotiating the contracts, or in some cases by
litigation. In 1999 AES renegotiated contracts for two of its "QFs"--Thames
(a partial prepayment) and Placerita (a complete buyout). Completion of the
Thames transaction is currently subject to approval by the Connecticut
Department of Public Utilities Commission, among other things.
Despite the recent movement toward electricity restructuring,
electricity markets in the United States are still heavily regulated. United
States laws and regulations still govern to some extent wholesale electricity
transactions, the type of fuel utilized, the
type of energy produced, and power plant ownership. State regulatory
commissions have jurisdiction over retail electricity transactions. United
States power projects also are subject to laws and regulations controlling
emissions and other substances produced by a plant and the siting of plants.
These laws and regulations generally require that a wide variety of permits
and other approvals be obtained before the construction or operation of a
power plant commences, and that the facility operate in compliance with these
permits thereafter
In the United States, so-called Qualifying Facilities ("QFs") are
relieved of compliance with extensive federal, state and local regulations by
the provisions of the Public Utility Regulatory Policies Act, as amended
("PURPA"). Some of AES's current domestic plants is a QF. Loss of QF status
would subject these plants to more extensive regulations. The Company
believes, however, that if needed it will be able to react in a manner that
would avoid the loss of QF status.
AES must obtain exemptions from, or become subject to regulation by,
the Securities and Exchange Commission under the Public Utility Holding
Company Act ("PUHCA") in regard to both its domestic and foreign utility
company holdings. There are a number of exemptions from PUHCA that are
available for both domestic and foreign utility company owners, including
those for QFs, Exempt Wholesale Generators and Foreign Utility Companies. In
August 1999, in connection with its acquisition of CILCORP, AES obtained an
order from the U.S. Securities and Exchange Commission approving the
Company's application to be classified as an exempt holding company under
Section 3(a)(5) of PUHCA. AES believes that it will be able to maintain
appropriate PUHCA exemptions both for CILCORP as well as its foreign utility
acquisitions, although no assurances can be given.
In addition, as one of the Company's major non-U.S. markets,
changes in Brazilian regulatory structures will have an impact on the
Company. The electricity industry in Brazil is regulated by the Brazilian
federal government, acting through the Ministry of Mines and Energy, which
has exclusive authority over the electricity sector through regulatory powers
assigned to it. This sector is currently in a state of rapid change in
Brazil. For example, pursuant to a federal law enacted in 1996, regulatory
policy for the sector, which was implemented by the Departmento Nacional de
Aguas e Energia Eletrica ("DNAEE"), is now implemented by a new autonomous
national electric energy agency (Agencia Nacional de Energia Eletrica or
"ANEEL"). ANEEL is an independent regulatory agency and delegates certain
functions to agencies based in certain states of Brazil. However, ANEEL
cannot delegate any authority regarding tariffs to state agencies.
ANEEL is responsible for (i) granting and supervising concessions
for electricity generation, transmission and distribution, including approval
of applications for the setting of electricity tariffs; (ii) supervising and
performing financial examinations of the concessionary companies; (iii)
issuing regulations for the electricity sector; and (iv) planning,
coordinating and executing water resource studies and granting and
supervising concessions for the use of water resources. Due to electricity
tariffs' significant weight in the measurement of national inflation, tariff
increases have been controlled by the Ministry of Finance, although it is not
its official responsibility.
In addition to the powers currently granted to DNAEE, ANEEL has the
following responsibilities: (i) to implement and regulate the exploitation of
electric energy and the use of hydroelectric power pursuant to the Power
Sector Law; (ii) to promote the bidding process for the granting of new
concessions; (iii) to solve administrative disputes among utilities, IPP
companies, self-producers and customers; and (iv) to determine the criteria
for the establishment of the cost of the transmission of energy pursuant to
the Power Sector Law. Nevertheless, until regulations regarding the
implementation of ANEEL are promulgated, DNAEE will continue to monitor and
regulate the Brazilian electricity sector.
UNITED STATES ENVIRONMENTAL REGULATIONS
The construction and operation of power projects are subject to
extensive environmental and land use laws and regulations. In the United
States those laws and regulations applicable to AES primarily involve the
discharge of effluents into the water, emissions into the air and the use of
water, but can also include wetlands preservation, endangered species, waste
disposal and noise regulation. These laws and regulations often require a
lengthy and complex process of obtaining licenses, permits and approvals from
federal, state and local agencies. If AES violates or fails to comply with
such laws, regulations, licenses, permits or approvals, AES could be fined or
otherwise sanctioned by regulators. In addition, under certain environmental
laws, AES could be responsible for costs relating to contamination at its
facilities or at third party waste disposal sites. AES is committed to
operating its businesses cleanly, safely and reliably and strives to comply
with all environmental laws, regulations, permits and licenses. Despite such
efforts, the Company has at times been in non-compliance with such laws,
regulations, licenses, permits and approvals, although no such instance has
resulted in revocation of any permit or license. AES has incurred and will
continue to incur capital and other expenditures to comply with environmental
laws. Although AES is not aware of any costs of complying with environmental
laws and regulations which would result in a material adverse effect on its
consolidated financial position or results of operations, there can be no
assurance that AES will not be required to incur such costs in the future.
Environmental laws and regulations are complex, change frequently
and have tended to become more stringent over time. If such laws and
regulations are changed and any of AES's facilities are not "grandfathered"
(that is, made exempt by the fact that the facility pre-existed the law) or
are not otherwise excluded, extensive modifications to a facility's
technologies and operations could be
required. Should environmental laws or regulations change in the future,
there can be no assurance that AES would be able to recover all or any
increased costs from its customers or that its consolidated financial
position or results of operations would not be materially and adversely
affected. In addition, the Company may be required to make significant
capital or other expenditures in connection with such changes in
environmental laws or regulations. The Company is not aware of any currently
planned changes in law, however, that would result in a material adverse
effect on its consolidated financial position or results of operations.
Clean Air Act. The Clean Air Act of 1970 (the "Clean Air Act of
1970"), as amended in 1990 (the "1990 Amendments"), sets guidelines for
emissions standards for major pollutants (in particular, SO2 and NOx) from
newly-built sources. Among other things, the 1990 Amendments attempt to
reduce acid rain precursor emissions (SO2 and NOx) from existing sources,
particularly large, older power plants that were exempted from certain
regulations under the Clean Air Act of 1970. Other provisions of the Clean
Air Act relate to the reduction of ozone precursor emissions (VOC and NOx)
and have resulted in the imposition by various states of "reasonably
available control technology" to reduce such emissions.
In 1997, the EPA published new standards that tighten ambient air
quality standards for ozone and fine particulate matter (PM 2.5). In May
1999, the EPA issued its final guidelines for the revised ground-level ozone
and particulate matter, which further delineate the so-called "non attainment
regions" and other non-attainment classifications. In October 1999, a federal
appeals court overturned the new standards. In January 2000, the Department
of Justice filed a petition seeking Supreme Court review of the decision. The
EPA anticipates resolution of this issue could take up to two years. If
additional ozone and particulate matter non-attainment areas are created,
AES's plants may be faced with further emission reduction requirements that
could necessitate both the installation of additional control technology and
a related increase in capital expenditures.
In October 1998, the EPA issued a final rule addressing the regional
transport of ground-level ozone across state boundaries to the eastern United
States through NOx (a precursor to ozone formation) emissions reduction from
various emission sources, including utility sources. The rule focuses on such
reductions in the eastern United States, requiring twenty two states and the
District of Columbia to submit revised "state implementation plans" (SIPs) by
September 1999 and have NOx emission controls in place by May 2003 (the "NOx
SIP call"). In March 2000, a federal appeals court upheld the NOx SIP call
rule. The decision is expected to be appealed. (In a related action, the EPA
in December 1999 granted petitions filed by four northeastern states seeking
to reduce ozone across state boundaries through reductions in NOx emissions
from 30 states and the District of Columbia. In granting the petitions, the
EPA made a finding that certain large electric utilities, including the AES
Beaver Valley plant in Pennsylvania, significantly contribute to air
pollution in other states. A number of electric utilities are expected to
challenge the EPA's action. If further reductions in NOx emissions are
required, AES would be required to make such reductions at some of its
facilities.
The 1990 Amendments also regulate certain hazardous air pollutants.
Although the hazardous air pollutant provisions of the 1990 Amendments
presently exclude electric steam generating facilities such as AES's domestic
plants, the 1990 Amendments direct the Environmental Protection Agency (the
"EPA") to prepare a study on hazardous air pollutant ("HAP") emissions from
power plants. A separate EPA study on mercury emissions from power plants,
the Final Mercury Study Report to Congress, released in December 1997,
describes the need for further research in the area of utility mercury
emission controls, as current control technology is still in an early stage
of development. In February 1998, the EPA released a final report on HAP
emissions from power plants that, among other things, concluded that the risk
of contracting cancer from exposure to HAPs (other than mercury) from most
plants is low (less than one in one million) and that further research on
mercury emissions was necessary. In March 1999, the EPA issued a report which
examined hypothetical pollution control options to reduce mercury emissions
from power plants. The EPA is expected to make a final determination on
whether to regulate mercury emissions from power plants by December 2000. If
it is determined that mercury emissions from power plants should be
regulated, the use of "maximum available control technology" could be
required.
The EPA has commenced an industry-wide investigation of coal-fired
electric power generators to determine compliance with environmental
requirements under the Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to the facilities over the years.
The EPA's focus is on whether the changes were subject to new source review
or new performance standards, and whether best available control technology
was or should have been used. On August 4, 1999, the EPA issued a notice of
violation ("NOV") to the AES Beaver Valley plant, generally alleging that the
facility failed to obtain the necessary permits in connection with certain
changes made to the facility in the mid-to-late 1980s. The Beaver Valley
facility disagrees with the EPA's findings and if a mutually acceptable
resolution is not reached, the EPA may seek to enforce the NOV through a
judicial process and seek monetary penalties and/or injunctive relief under
the Clean Air Act. The Company believes that the Beaver Valley facility has
meritorious defenses to such an action and expects the facility to vigorously
defend itself if any action is brought against it.
In October 1999, a subsidiary of the Company received an information
request letter from the New York Attorney General, which sought detailed
operating and maintenance history for certain plants. On January 13, 2000, a
subsidiary of the Company received a subpoena from the New York State
Department of Environmental Conservation ("DEC") seeking similar operations
and maintenance history for additional plants. The information is being
sought in connection with the Attorney General's and the DEC's investigations
of several electricity generating stations in New York that are suspected of
undertaking medications in the past without undergoing an air permitting
review. If the Attorney General or the DEC does file an enforcement action
against the Company, then penalties might be imposed and further emission
reductions may be necessary at these plants. The Company believes that it has
meritorious defenses to such an action and expects the facility to
vigorously defend itself if any action is brought against it.
13
On November 3, 1999, the Department of Justice filed lawsuits on
behalf of the EPA charging that 32 electric utility plants made illegal
repairs to facilities, causing the release of massive amounts of air
pollutants. Although AES was not named as one of the owners of the affected
utility plants, there can be no assurances that it will not be named in
similar lawsuits in the future.
The Company does not believe that any of the potential issues
discussed above or any additional requirements imposed as a result of such
issues will have a material adverse effect on its consolidated financial
position or results of operations. There can be no assurance, however, that
they will not have such an effect in the future.
Hazardous Waste Regulation. Based on a 1988 study, the EPA does not
regulate most coal combustion ash as a hazardous waste. In a report to
Congress in March 1999, the EPA tentatively concluded that coal combustion
ash should remain exempt from regulation, but the EPA is expected to publish
a regulatory "determination" on this subject by April 10, 2000. The Company
has recently learned that the EPA is considering moving in the direction of
making a major change in the regulation of coal ash, possibly requiring that
some coal combustion ash be regulated as a hazardous waste. The standards and
criteria that would trigger such regulation would have to be developed by the
EPA in future rulemaking proceedings, possibly after additional ash studies.
The Company cannot predict the timing or the outcome of such regulatory
actions at this time. If the EPA decides, and is able, to regulate coal ash
as a hazardous or special waste, AES could incur additional ash management or
disposal costs from its plants.
14
FOREIGN ENVIRONMENTAL REGULATIONS
AES has ownership interests in operating power plants in many
countries outside the United States. Each of these countries (and the
localities therein) have separate laws and regulations governing the siting,
permitting, ownership and power sales from AES's plants that are often
different than those in effect in the United States. In addition to such
foreign laws and regulations, projects funded by the World Bank are subject
to World Bank environmental standards, which may be more stringent than local
country standards but are typically not as strict as corresponding standards
in the United States. Whenever feasible, AES attempts to use advanced
environmental technologies (such as CFB coal technology or advanced gas
turbines) in its non-U.S. businesses in order to minimize environmental
impacts.
15
Based on current trends, AES expects that environmental and land use
regulations affecting its plants located outside the United States will
likely become more stringent over time. This may be due in part to a greater
participation by local citizenry in the monitoring and enforcement of
environmental laws, better enforcement of applicable environmental laws by
the regulatory agencies, and the adoption of more sophisticated environmental
requirements. If foreign environmental and land use regulations were to
change in the future, the Company may be required to make significant capital
or other expenditures. There can be no assurance that AES would be able to
recover all or any increased costs from its customers or that its business,
financial condition or results of operations would not be materially and
adversely affected by future changes in foreign environmental and land use
regulations.
EMPLOYEES
At December 31, 1999, AES and its subsidiaries employed
approximately 14,500 people.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following is certain information concerning the present
executive officers and significant employees of the Registrant set out in
alphabetical order.
Dennis W. Bakke, 54 years old, co-founded the Registrant with Roger
Sant in 1981 and has been a director of the Registrant since 1986. He has
been President of the Registrant since 1987 and Chief Executive Officer since
January 1994. From 1987 to 1993, he served as Chief Operating Officer of the
Registrant; from 1982 to 1986, he served as Executive Vice President of the
Registrant; and from 1985 to 1986 he also served as Treasurer of the
Registrant. He served with Mr. Sant as Deputy Assistant Administrator of the
Federal Energy Agency ("FEA") from 1974 to 1976 and as Deputy Director of the
Energy Productivity Center, an energy research organization affiliated with
The Mellon Institute at Carnegie-Mellon University, from 1978 to 1981. He is
a trustee of Rivendell School and a member of the Board of Directors of
MacroSonix Corporation in Richmond, Virginia.
Mark S. Fitzpatrick, 49 years old, was appointed Executive Vice
President in February 2000, was Senior Vice President until February 2000, and
was appointed Vice President of the Registrant in 1987. Mr. Fitzpatrick
became Managing Director of Applied Energy Services Electric Limited for the
United Kingdom and Western Europe operations in 1990. From 1984 to 1987, he
served as a project director of the AES Beaver Valley and AES Thames projects.
Paul T. Hanrahan, 42 years old, has been a Senior Vice President
since 1997, and was appointed Vice President of the Registrant effective
January 1994. Since May 1, 1998, Mr. Hanrahan has been Managing Director of
AES Americas South, a business group within AES responsible for all of AES's
activities in Argentina, Paraguay, Southern Brazil, Peru and Chile. From
February 1995 until becoming Managing Director of AES Americas South he was
President and Chief Executive Officer of AES Chigen, where he served as
Executive Vice President, Chief Operating Officer and Secretary from December
1993 until February 1995. He was General Manager of AES Transpower, Inc., a
subsidiary of the Registrant, from 1990 to 1993.
Lenny M. Lee, 41 years old, was appointed Vice President in February
2000 and has served as Managing Director of AES Transpower since June 1998. As
Managing Director of AES Transpower, Mr. Lee
16
leads the AES group responsible for all of AES's business, including project
development and plant operations, in Australia, New Zealand, portions of
Southeast Asia (Thailand, Indonesia, Malaysia and Vietnam) Hawaii and
Southern China. Prior to his appointment, Mr. Lee developed various projects
within the same group. Mr. Lee has been with the Company since August 1987.
William R. Luraschi, 36 years old, has been Vice President of the
Registrant since January 1998, Secretary since February 1996 and General
Counsel of the Registrant since January 1994. Prior to that, Mr. Luraschi was
an attorney with the law firm of Chadbourne & Parke L.L.P.
David G. McMillen, 61 years old, was named Vice President of the
Company in December 1991. He was appointed President of AES Shady Point in
1995 and is currently plant manager of the AES Shady Point facility. He was
President of AES Thames from 1989 to 1995. From 1985 to 1988, he served as
plant manager of the AES Beaver Valley plant and from 1986 to 1988 he served
as President of AES Beaver Valley.
Dr. Roger F. Naill, 52 years old, has been Vice President for
Planning at AES since 1981. Prior to joining the Registrant, Dr. Naill was
Director of the Office of Analytical Services at the U.S. Department of
Energy.
Shahzad S. Qasim, 45 years old, was appointed Vice President of the
Company in February 2000 and has served as Managing Director of AES Oasis
since April 1998. As Managing Director of AES Oasis, Mr. Qasim leads the AES
group responsible for all of AES's business, including project development
and plant operations, in Pakistan, India, portions of South Asia and the
Middle East. Prior to his appointment, Mr. Qasim had been developing various
projects within the same geographical region for the Company. Mr. Qasim has
been with the Company since November 1992; before he joined the Company Mr.
Qasim was with the international management consulting firm of McKinsey &
Company.
William Ruccius, 48 years old, was appointed Vice President of the
Company in February 2000 and has served as Managing Director of AES Orient
since June 1998. As Managing Director of AES Orient, Mr. Ruccius leads the
AES group responsible for all of AES's business, including project
development and plant operations, in Northern China and most of North and
East Asia including the Philippines. From June 1996 until his appointment as
Managing Director, he was President and CEO of AES Lal Pir and AES Pak Gen,
the Company's duel Pakistani generating facilities. Prior to that Mr. Ruccius
was Plant Manager at AES Hawaii from April 1995 to June 1996 and worked at
AES Deepwater from June 1993 to April 1995.
John Ruggirello, 49 years old, was appointed Executive Vice
President of the Registrant in February 2000, was Senior Vice President until
February 2000 and was appointed Vice President in January 1997. Mr.
Ruggirello heads an AES group responsible for project development,
construction and plant operations in much of the United States and Canada. He
served as President of AES Beaver Valley from 1990 to 1996.
J. Stuart Ryan, 41 years old, was appointed Executive Vice President
of the Registrant in February 2000, was Senior Vice President until February
2000 and is Managing Director of the AES Pacific group which is responsible
for the Company's business in the western United States. Between 1994 and
1998, Mr. Ryan lead the AES Transpower group responsible for AES's activities
in Asia (excluding China). From 1994 through 1997, he served as Vice
President of the Registrant. Prior to 1994, Mr. Ryan served as general
manager of a group within AES.
Roger W. Sant, 68 years old, co-founded the Company with Dennis
Bakke in 1981. He has been Chairman of the Board and a director of the
Registrant since its inception, and he held the office of Chief
17
Executive Officer through December 31, 1993. He currently is Chairman of the
Boards of Directors of The Summit Foundation and The World Wildlife Fund
U.S., and serves on the Boards of Directors of The World Resources Institute,
the World Wide Fund for Nature and Marriott International, Inc. He was
Assistant Administrator for Energy Conservation and the Environment of the
Federal Energy Agency ("FEA") from 1974 to 1976 and the Director of the
Energy Productivity Center, an energy research organization affiliated with
The Mellon Institute at Carnegie-Mellon University, from 1977 to 1981.
Barry J. Sharp, 40 years old, was appointed Senior Vice President
and Chief Financial Officer effective January 1998 and had been Vice
President and Chief Financial Officer since 1987. He also served as Secretary
of the Registrant until February 1996. From 1986 to 1987, he served as the
Company's Director of Finance and Administration. Mr. Sharp is a certified
public accountant.
Sarah Slusser, 37 years old, was appointed Vice President of the
Registrant in January 1999, and was appointed President of AES Aurora, Inc.,
effective April 1997. AES Aurora is a wholly owned subsidiary of the Company
and a group of AES which is responsible for business development,
construction and operations of facilities and projects in Mexico, Central
America, the Caribbean and the Gulf States in the United States. Prior to
that, Ms. Slusser served as Project Director for various AES projects in the
same region from 1993 to 1997.
Paul D. Stinson, 43 years old, was appointed Vice President of the
Registrant effective January 1998. Since April 1997 Mr. Stinson has been
Managing Director of AES Silk Road, Ltd., a wholly owned subsidiary of the
Company, which is a group of AES responsible for business development,
construction and operations of facilities and projects in Russia, Kazakhstan,
Pakistan and other parts of Asia. Mr. Stinson served as Managing Director of
Medway Power Ltd. from 1994 until 1997 and was Plant Manager of the Medway
Power Station owned by Medway Power Ltd. from 1992 to 1997.
Thomas A. Tribone, 47 years old, Executive Vice President since
January 1998, and had been Senior Vice President of the Registrant from 1990
to January 1998. Mr. Tribone and leads AES Americas, a group responsible for
power marketing, project development, construction and plant operations in
northern portions of South America including much of Brazil. From 1987 to
1990 he served as Vice President for project development and from 1985 to
1987 he served as project director of the AES Shady Point plant.
Kenneth R. Woodcock, 56 years old, has been Senior Vice President of
the Registrant since 1987. Mr. Woodcock is responsible for coordinating AES's
relationships with the investment community, and he provides support for AES
business development activities worldwide. From 1984 to 1987, he served as a
Vice President for Business Development. Prior to the founding of AES he
served in the United States federal government in energy and environment
departments.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES.
See the information contained under the caption "Segments" in Note
15 to the Consolidated Financial Statements included in Item 8 herein.
ITEM 2. PROPERTIES
18
Offices are maintained by the Registrant in many places around the
world which are generally occupied pursuant to the provisions of long and
short-term leases, none of which are material to the Company. With a few
exceptions, the Registrant's facilities which are described in Item 1 hereof
are subject to mortgages or other liens or encumbrances as part of the
project's related finance facility. The land interest held by the majority of
the facilities is that of a lessor or, in the case of the facilities located
in the People's Republic of China, a land use right that is leased or owned
by the related joint venture that owns the project. However, in a few
instances there exists no accompanying project financing for the facility and
in a few of these cases the land interest may not be subject to any
encumbrance and is owned by the subsidiary or affiliate owning the facility
outright.
ITEM 3. LEGAL PROCEEDINGS.
In September 1999, an appellate judge in Minas Gerais state court
system granted a temporary injunction that suspended the effectiveness of the
shareholders' agreement for Companhia Energetica de Minas Gerais ("Cemig").
The appellate ruling suspended the shareholders' agreement while the action
to determinate the validity of the shareholders' agreement is litigated.
In early November 1999, the same appellate court modified in part
this decision and reinstated the effectiveness of the shareholders'
agreement, but not the super majority voting rights afforded to the Company
under the agreement. In February 2000, as a result of a new motion filed by
the State of Minas Gerais, the appellate court reversed such modification and
confirmed the temporary injunction suspending the effectiveness of the
shareholders' agreement.
In March 2000, the Minas Gerais state trial court determined that
the shareholders' agreement is invalid on the grounds that it violated the
State of Minas Gerais constitution because it transferred control without the
approval of the state's legislative assembly. The Company intends to appeal
this decision, and vigorously pursue its legal rights in this matter in order
to restore all of its rights under the shareholders' agreement.
The EPA has commenced an industry-wide investigation of coal-fired
electric power generators to determine compliance with environmental
requirements under the Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to the facilities over the years.
The EPA's focus is on whether the changes were subject to new source review
or new performance standards, and whether best available control technology
was or should have been used. On August 4, 1999, the EPA issued a notice of
violation ("NOV") to the AES Beaver Valley plant, generally alleging that the
facility failed to obtain the necessary permits in connection with certain
changes made to the facility in the mid-to-late 1980s. The Beaver Valley
facility disagrees with the EPA's findings and if a mutually acceptable
resolution is not reached, the EPA may seek to enforce the NOV through a
judicial process and seek monetary penalties and/or injunctive relief under
the Clean Air Act. The Company believes that the Beaver Valley facility has
meritorious defenses to such an action and expects the facility to vigorously
defend itself if any action is brought against it.
In October 1999, a subsidiary of the Company received an information
request letter from the New York Attorney General, which sought detailed
operating and maintenance history for certain plants. On January 13, 2000, a
subsidiary of the Company received a subpoena from the New York State
Department of Environmental Conservation ("DEC") seeking similar operations
and maintenance history for additional plants. The information is being
sought in connection with the Attorney General's and the DEC's investigations
of several electricity generating stations in New York that are suspected of
undertaking medications in the past without undergoing an air permitting
review. If the Attorney General or the DEC does file an enforcement action
against the Company, then penalties might be imposed and further emission
reductions may be necessary at these plants. The Company believes that it has
meritorious defenses to such an action and expects the facility to vigorously
defend itself if any action is brought against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET INFORMATION.
The common stock of the Company is currently traded on the New York
Stock Exchange (NYSE) under the symbol "AES". The following tables set forth
the high and low sale prices for the common stock as reported by the NYSE for
the periods indicated.
19
Price Range of Common Stock 1999 High Low 1998 High Low
- ----------------------------- --------------- -------- -------- ---------------- -------- -------
First Quarter 49 1/4 32 13/16 First Quarter $54 5/16 $39 3/8
--------------- -------- -------- ---------------- -------- -------
Second Quarter 59 3/4 36 3/4 Second Quarter 58 45 1/4
--------------- -------- -------- ---------------- -------- -------
Third Quarter 66 11/16 53 1/16 Third Quarter 55 3/8 23
--------------- -------- -------- ---------------- -------- -------
Fourth Quarter 76 3/8 50 7/16 Fourth Quarter 47 3/8 32
--------------- -------- -------- ---------------- -------- -------
(b) HOLDERS.
As of February 23, 2000, there were 1,092 record holders of the
Registrant's Common Stock, par value $0.01 per share.
(c) DIVIDENDS.
Under the terms of the Company's corporate revolving loan and
letters of credit facility of $600 million entered into with a commercial
bank syndicate and $250 million letter of credit facility, the Company is
currently prohibited from paying cash dividends. In addition, the Registrant
is precluded from paying cash dividends on its Common Stock under the terms
of a guaranty to the utility customer in connection with the AES Thames
project in the event certain net worth and liquidity tests of the Registrant
are not met. The Registrant has met these tests at all times since making the
guaranty.
The ability of the Registrant's project subsidiaries to declare and
pay cash dividends to the Registrant is subject to certain limitations in the
project loans, governmental provisions and other agreements entered into by
such project subsidiaries. Such limitations permit the payment of cash
dividends out of current cash flow for quarterly, semiannual or annual
periods only at the end of such periods and only after payment of principal
and interest on project loans due at the end of such periods, and in certain
cases after providing for debt service reserves.
ITEM 6. SELECTED FINANCIAL DATA.
(in millions, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
Revenues $ 3,253 $ 2,398 $1,411 $ 835 $ 679
Income before income taxes, minority
interest, and extraordinary items 420 546 284 207 175
Extraordinary items, net of applicable
income tax/(benefit) (17) 4 (3) -- --
Net income 228 311 185 125 107
Basic earnings per share:
Before extraordinary items $ 1.28 $ 1.73 $ 1.13 $ 0.83 $ 0.71
Extraordinary items (0.09) 0.02 (0.02) -- --
Basic earnings per share $ 1.19 $ 1.75 $ 1.11 $ 0.83 $ 0.71
Diluted earnings per share:
Before extraordinary items $ 1.25 $ 1.67 $ 1.11 $ 0.80 $ 0.70
Extraordinary items (0.09) 0.02 (0.02) -- --
Diluted earnings per share $ 1.16 $ 1.69 $ 1.09 $ 0.80 $ 0.70
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Total assets $20,880 $10,781 $8,909 $3,622 $2,341
Project financing debt (long-term) 8,651 3,597 3,489 1,558 1,098
Other notes payable (long-term) 2,167 1,644 1,096 450 125
Mandatorily redeemable preferred 22 -- -- -- --
stock of subsidiary
Company-obligated
convertible mandatorily
redeemable preferred
securities of subsidiary 1,318 550 550 -- --
trust holding solely
junior subordinated
debentures of AES
Stockholders' equity 2,637 1,794 1,481 721 549
- --------------------------------------------------------------------------------------------------------------------
No cash dividends were declared by the Registrant on its common stock during
the five-year period ended December 31, 1999.
The comparability of the information in the table above is materially
affected by various business combinations and asset acquisitions. See Notes 2
and 3 to the Consolidated Financial Statements included in Item 8 herein.
ITEM 7. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INTRODUCTION
EXISTING OPERATIONS. The AES Corporation and its subsidiaries and affiliates
(collectively "AES" or the "Company") are a global power company committed to
serving the world's needs for electricity in a socially responsible way.
AES's electricity "generation" business consists of sales to wholesale
customers (generally electric utilities, regional electric companies or
wholesale commodity markets known as "power pools") for further resale to end
users. AES also sells electricity directly to end users such as commercial,
industrial, governmental and residential customers through its "distribution"
business.
AES's generation business represented 61% of total revenues in 1999 compared
to 59% for 1998. Sales within the generation business are made under
long-term contracts from power plants owned by the
20
Company's subsidiaries and affiliates, as well as directly into power pools.
The Company owns new plants constructed for such purposes ("greenfield"
plants) as well as older power plants acquired through competitively bid
privatization initiatives or negotiated acquisitions.
AES's distribution business represented 39% of total revenues for 1999 compared
to 41% for 1998. Electricity sales by AES's distribution businesses, including
affiliates, are generally made pursuant to the provisions of long-term
electricity sale concessions granted by the appropriate governmental
authorities. In certain cases, these distribution companies are "integrated", in
that they also own electric power plants for the purpose of generating a portion
of the electricity they sell.
In its generation business, AES now operates and owns (entirely or in part) a
diverse portfolio of electric power plants (including those within the
integrated distribution companies discussed below) with a total capacity of
36,675 megawatts (MW). Of that total, 33% are fueled by coal or petroleum coke,
18% are fueled by natural gas, 15% are hydroelectric facilities, 4% are fueled
by oil, and the remaining 30% are capable of using multiple fossil fuels. Of the
total MW, 7,606 (eighteen plants) are located in the United States, 754 (seven
plants) are in China, 1,281 (three plants) are in Hungary, 9,106 (fifty-one
plants) are in Brazil, 5,763 (six plants) are in the UK, 885 (six plants) are in
Argentina, 7,909 (seven plants) are in Kazakhstan (including 4,000 MW
attributable to Ekibastuz which currently has a reliable capacity of
approximately 22%), 210 (one plant) are in the Dominican Republic, 110 (one
plant) are in Canada, 695 (two plants) are in Pakistan, 405 (one plant) are in
the Netherlands, 1,254 (three plants) are in Australia, 420 (one plant) are in
India, 277 (four plants) are in Panama.
AES has majority ownership in three distribution companies in Argentina and
individual distribution companies in the United States, Brazil, El Salvador,
Dominican Republic, and The Republic of Georgia. The Company also has assumed
management control of a heat and electricity distribution business in
Kazakhstan. In addition the Company has less than majority ownership in three
additional distribution companies in Brazil and one in India. These distribution
companies serve a total of over 15 million customers with annual sales exceeding
109,000 gigawatt hours. On a net equity basis, AES's ownership represents
approximately 5.4 million customers and annual sales exceeding over 24,000
gigawatt hours. The Company also has three subsidiaries in the United States
that serve retail customers in those states that have introduced a competitive
market for the sale of electricity to end users.
CONSTRUCTION AND BUSINESS DEVELOPMENT ACTIVITIES. AES is also currently in the
process of adding approximately 6,646 MW to its operating portfolio through its
construction of greenfield plants. These include a 454 MW natural gas-fired
plant, a 705 MW natural gas-fired plant, and a 180 MW coal-fired plant in the
United States, two natural gas-fired plants totaling 600 MW in Brazil, a 2,100
MW coal-fired plant in China, an 830 MW natural gas-fired plant, a 123 MW
hydroelectric facility in Argentina, a refurbished 360 MW coal-fired plant in
England, two natural gas-fired plants totaling 810 MW in Bangladesh and a 484 MW
natural gas-fired plant in Mexico.
As a result, AES's total MW of the 122 power plants in operation or under
construction is approximately 43,321 MW and net equity ownership (total MW
adjusted for the Company's ownership percentage) represents approximately 31,751
MW.
Because of the significant complexities associated with building new electric
generating plants, construction periods often range from two to five years,
depending on the technology and location. AES
21
currently expects that projects now under construction will reach
commercial operation and begin to sell electricity at various dates through
the year 2004. The timely completion of each plant is generally supported by
a guarantee from the plant's construction contractor, although in certain
cases, AES has assumed the risk of successfully completing construction.
Changes in economic, political, technological, regulatory or logistical
circumstances may substantially delay, or in some cases even prevent,
completion and commercial operation.
In addition, a Brazilian subsidiary Eletronet is in the process of constructing
a national broadband telecommunications network attached to the existing
national transmission grid in Brazil.
AES continues to believe that there is significant demand for more
efficiently operated electricity generation and distribution businesses. As a
result AES is pursuing additional greenfield development projects and
acquisitions in many countries. Several of these, if consummated, would
require the Company to obtain substantial additional financing, including
both debt and equity financing.
Certain subsidiaries and affiliates of the Company (domestic and non-U.S.) have
signed long-term contracts or made similar arrangements for the sale of
electricity and are in various stages of developing the related greenfield power
plants. Successful completion depends upon overcoming substantial risks,
including, but not limited to, risks relating to failures of siting, financing,
construction, permitting, governmental approvals or termination of the power
sales contract as a result of a failure to meet certain milestones. As of
December 31, 1999, capitalized costs for projects under development and in early
stage construction were approximately $53 million. The Company believes that
these costs are recoverable; however, no assurance can be given that individual
projects will be completed and reach commercial operation.
The Company has been actively involved in the acquisition and operation of
electricity assets in countries that are restructuring and deregulating the
electricity industry. Some of these acquisitions have been made from other
electricity companies that have chosen to exit the electricity generation
business. In these situations, sellers generally seek to complete competitive
solicitations in less than one year, which is much faster than the time incurred
to complete greenfield developments, and require payment in full on transfer.
AES believes that its experience in competitive markets and its worldwide
integrated group structure (with its significant geographic coverage and
presence) enable it to react quickly and creatively in such situations.
The financing for such acquisitions, in contrast to that for greenfield
development, often must be arranged quickly and therefore may preclude the
Company from arranging non-recourse project financing (the Company's
historically preferred financing method, which is discussed further under
"Capital Resources, Liquidity and Market Risk"). Moreover, acquisitions that are
large, that occur simultaneously with one another or those occurring
simultaneously with commencing construction on several greenfield developments
would potentially require the Company to obtain substantial additional
financing, including both debt and equity. As a result, and in order to enhance
its financial capabilities to respond to these more accelerated opportunities,
the Company maintains a $600 million revolving line and letter of credit
facility (the Revolver) and a $250 million letter of credit facility. AES also
maintains a "universal shelf" registration statement with the SEC which allows
for the public issuance of various additional debt and preferred or common
equity securities, either individually or in combination, and which currently
represents approximately $932 million in unused potential proceeds from the
issuance of public securities.
22
RESULTS OF OPERATIONS
GENERATION. Traditionally, most of AES's generation plants have sold electricity
under long-term power sales agreements to electric utilities or state-owned
power companies. Generated electricity is sold under a two part pricing method,
representing the two main products, capacity and energy, produced by electric
generating facilities. Energy refers to the sale of the actual electricity
produced by the plant and capacity refers to the amount of generation reserved
for a particular customer, irrespective of the amount of energy actually
purchased. Most of the Company's generating businesses (based upon revenues) are
structured so that each power plant generally relies on one power sales contract
with a single electric customer for the majority, if not all, of its revenues.
The prolonged failure of any significant customer to fulfill its contractual
payment obligations in the future could have a substantial negative impact on
AES's results of operations. The Company has sought to reduce this risk, where
possible, by entering into power sales contracts with customers who have their
debt or preferred securities rated "investment grade", or by obtaining sovereign
government guarantees of the purchaser's obligations, as well as by locating its
plants in different geographic areas in order to mitigate the effects of
regional economic downturns.
However, AES does not limit its business solely to the most developed countries
or economies, nor even to those countries with investment grade sovereign credit
ratings. In certain locations, particularly in developing countries or countries
that are in a transition from centrally-planned to market-oriented economies,
the electricity purchasers, both wholesale and retail, may be unable or
unwilling to honor their payment obligations. Moreover collection of receivables
may be hindered in these countries due to ineffective systems for adjudicating
contract disputes.
At some generation plants, all or a portion of the electricity sales are not
sold pursuant to a long-term contract and are sold into the short-term
contract or spot electricity markets. The prices paid for electricity in the
spot markets can be, and from time to time, have been unpredictable and
volatile. Electricity price volatility often exists in those regions in the
United States and other parts of the world that are introducing competitive
energy markets and where periods of temporary shortage of or excess supply of
electricity occur. This volatility is influenced by peak demand requirements,
weather conditions, competition, electricity transmission constraints and
fuel prices, as well as plant availability and other relevant factors. The
majority of the electricity generated at the New York plants and a
significant portion of that generated by the Drax plant and the generation
businesses in Argentina is sold into power pools or under short-term
contracts (or in case of the Drax plant subject to the provisions of
contractual instruments that have the effect of hedging a portion of the
plant's output from price volatility). As a result, the sales revenues
(consisting of both volume and price considerations) from these businesses
are less predictable and subject to potentially greater variability from
period to period than those businesses selling under long-term sales
contracts.
DISTRIBUTION. In the United States, the Company participates in certain
competitive retail electricity supply markets, where state laws permit, by
selling electricity to end users. In these markets, the Company typically enters
into one to three year electricity supply contracts with its customers. These
contracts may be structured as shared savings arrangements, fixed savings
arrangements or fixed price supply contracts. In certain of its fixed savings
arrangements and fixed price supply contracts, the cost
23
to supply electricity to the customer may be greater than the price the
customer is required to pay the Company. The Company also engages in
wholesale purchases and sales of electricity to support its electricity sales
to end users. AES also owns and operates an integrated distribution company,
CILCORP, that serves approximately 193,000 electric and 202,000 gas customers
in Central Illinois under existing state regulatory provisions that provide
for the transition to a competitive market. Under these provisions, CILCORP's
return on equity is subject to regulation by the Illinois state regulatory
authorities.
Outside of the United States, retail electricity sales by AES's distribution
businesses are made pursuant to provisions of long-term electricity sales
concession agreements ranging in remaining length from 17 to 92 years. Each
business is generally authorized to charge its customers a tariff for electric
services that consists of two components: an energy expense pass-through
component and an operating cost component. Both components are established as
part of the original grant of the concession for certain initial periods
(ranging from four to eight years remaining). Beginning subsequent to the
initial periods, and at regular intervals thereafter, the concession grantor has
the authority to review the costs of the relevant business to determine the
inflation adjustment (or other similar adjustment factor), if any, to the
operating cost component (the "Adjustment Escalator") for the subsequent regular
interval. This review can result in an Adjustment Escalator that has a positive,
zero or negative value. This electricity market structure is often referred to
as "price-cap" regulation, because the investors rate of return on its equity is
not directly subject to regulation. To date, the Company has not reached the end
of the initial tariff periods in any of its distribution businesses. As a
result, there can be no assurance as to the effects, if any, on its future
results of operations of potential changes to the Adjustment Escalator.
As stated above, the electricity sales concessions provide for an annual
adjustment to the tariff, resulting in adjustments based on several factors
including inflation increases as measured by different agreed upon indices.
In certain situations, although not including Brazil, there is also an
explicit linkage through the pricing provisions of the contract to a portion
of the tariff that reflects changes, either entirely or in part, in exchange
rates between the local currency and the U.S. Dollar. Such adjustments are
made in arrears at various regular intervals, and in certain cases, requests
for interim adjustments are permitted.
If a foreign currency experiences a sudden or severe devaluation relative to the
U.S. Dollar (the Company's reporting currency), such as occurred to the
Brazilian Real in January 1999, because of the lack of direct adjustment to the
then current exchange rate, the in arrears nature of the respective adjustment
in the tariff or the potential delays or magnitude of the resulting local
currency inflation of the tariff, the future results of operations of AES's
distribution companies in that country could be adversely affected. Depending on
the duration or severity of such devaluation, the future results of operations
of AES may also be adversely affected. During 1999, the Brazilian Real
experienced a significant devaluation relative to the U.S. Dollar, declining
from 1.21 Brazilian Reais to the Dollar at December 31, 1998 to an average of
1.81 Reais to the Dollar for the year ended December 31, 1999.
In Brazil, AES has interests in four distribution companies or integrated
utilities (the Brazilian Businesses). These companies have long-term
concession agreements which, although varying in term, have similar clauses
providing for tariff adjustments based on certain specific events or
circumstances. These adjustments occur annually (at different times) for each
Brazilian Business and, in certain instances, in response to specific
requests for adjustment. Adjustments to the tariff rates during the annual
proceedings are designed to reflect, among others, (i) increases in the
inflation rate as represented by a Brazilian inflation index (IGPM), and (ii)
increases in specified operating costs (including
24
purchased power costs), in each case as measured over the preceding
twelve months. The specific tariff adjustment mechanism provides each Brazilian
Business the option to request additional rate adjustments arising from
significant events, such as the increase in cost of purchased power due to
exchange rate variations, which disrupt the economic and financial equilibrium
of such business. Other normal, or recurring, events are also included as a
specific tariff increase and may include normal increases in purchased power
costs, taxes on revenue generated or local inflation. The Brazilian Business
requesting relief has the burden to prove the impact on its financial or
economic equilibrium, however, there can be no assurance that such adjustments
will be granted. Each Brazilian Business intends to recover the specific rate
adjustments provided for in the concession agreements, and approximately $30
million of these costs (representing the Company's portion of such costs) that
are expected to be recovered through future tariff increases were deferred in
1999.
1999 COMPARED TO 1998
REVENUES. Revenues increased $855 million, or 36%, to $3.25 billion in 1999 from
$2.40 billion in 1998. The increase in revenues is due primarily to the
acquisition of both new generation and distribution businesses, as well as from
the commercial operation of greenfield generation projects.
Generation revenues increased $557 million, or 39%, to $1.97 billion in 1999
and accounted for 65% of the Company's total increase in revenues in 1999.
New businesses acquired during 1999 that contributed significantly to the
overall increase in generation revenues include certain of the New York
plants, Drax and Panama. A full year of operations at Southland and Barry, as
well as the acquisitions of Tiete and CILCORP in the fourth quarter of 1999
also contributed to the increase in generation revenues.
Distribution revenues increased $298 million, or 30%, to $1.28 billion in 1999
and accounted for 35% of the Company's total increase in revenues in 1999. New
businesses acquired during 1999 that contributed significantly to the overall
increase in distribution revenues include NewEnergy, CILCORP and EDE Este. A
full year of operations at Edelap also contributed to the increase in revenues.
Distribution revenues were negatively impacted at Sul due to the effects of the
devaluation of the Brazilian Real in early 1999.
GROSS MARGIN. Gross margin, which represents total revenues reduced by cost of
sales, increased $193 million, or 24%, to $1.00 billion in 1999 from $811
million in 1998. Gross margin as a percentage of revenues decreased to 31% in
1999 from 34% in 1998. The decrease in gross margin as a percentage of revenues
is due to the decrease in the distribution gross margin.
The generation gross margin increased $203 million, or 35%, to $779 million in
1999 from $576 million in 1998. The generation gross margin as a percentage of
revenues remained fairly constant at 40% in 1999 and 41% in 1998.
The distribution gross margin decreased $10 million, or 4%, to $225 million in
1999 from $235 million in 1998. The distribution gross margin as a percentage of
revenues decreased to 18% in 1999 from 24% in 1998. The decrease in gross margin
is due primarily to a decline in gross margin at Sul which was negatively
impacted by the devaluation of the Brazilian Real. The overall decrease in gross
margin as a percentage of revenues is due primarily to losses at NewEnergy and
CESCO, both of which were acquired in 1999.
25
PROVISION TO REDUCE CONTRACT RECEIVABLES. The provision to reduce contract
receivables decreased $14 million, or 64%, to $8 million in 1999 from $22
million in 1998. The overall decrease in the provision resulted from a decrease
in the generation provision to reduce contract receivables offset by an increase
in the distribution provision. The generation provision was reduced due to a
favorable settlement with the government of Kazakhstan as well as improved
collections at Los Mina in the Dominican Republic. The distribution provision
increased due mainly to the provision recorded at Telasi, a distribution company
in Tbilisi, Georgia, that was acquired during 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $15 million, or 27%, to $71 million in 1999
from $56 million in 1998. Selling, general and administrative expenses as a
percentage of revenues remained constant at 2% in both 1999 and 1998. The
increase is due in equal part to an increase in corporate overhead and an
increase in business development activities.
INTEREST EXPENSE. Interest expense increased $156 million, or 32%, to $641
million in 1999 from $485 million in 1998. Interest expense as a percentage of
revenues remained constant at 20% in both 1999 and 1998. Interest expense
increased primarily due to the interest at new businesses, as well as additional
corporate interest costs arising from the senior debt and convertible securities
issued within the past two years.
INTEREST INCOME. Interest income increased $10 million, or 15%, to $77 million
in 1999 from $67 million in 1998. Interest income as a percentage of revenues
decreased to 2% in 1999 from 3% in 1998. Interest income increased primarily due
to an increase in funds available for investment.
NET GAIN ON CONTRACT BUYOUT. The Company recorded a $29 million gain (before
extraordinary loss) in 1999 from the buyout of its long-term power sales
agreement at Placerita. The Company received gross proceeds of $110 million
which were offset by transaction related costs of $19 million and an impairment
loss of $62 million to reduce the carrying value of the electric generation
assets to their estimated fair value after termination of the contract. The
estimated fair value was determined by an independent appraisal. Concurrent with
the buyout of the power sales agreement, the Company repaid the related project
financing debt prior to its scheduled maturity and recorded an extraordinary
loss of $11 million, net of income taxes.
FOREIGN CURRENCY TRANSACTION GAIN (LOSS). In businesses which are controlled and
consolidated by the Company, the Company recorded $9 million of foreign currency
transaction gains during 1999 and $1 million of foreign currency transaction
losses in 1998. The foreign currency transaction gain in 1999 resulted from the
increase in the Brazilian Real sub-sequent to the Company's acquisition of Tiete
in the fourth quarter of 1999 offset by a decline in the value of the Pakistani
Rupee. The Company was also negatively impacted by the devaluation of the
Brazilian Real during the first nine months of 1999. The Brazilian Real
experienced a significant devaluation relative to the U.S. Dollar, declining
from 1.21 Reais to the Dollar at December 31, 1998 to an average of 1.81 Reais
for the year ended December 31, 1999. The Company recorded $203 million of
foreign currency transaction losses on its investments in Brazilian affiliates
during 1999. Equity in earnings of affiliates (before income tax) is presented
net of the foreign currency transaction losses in the statements of operations.
26
EQUITY IN EARNINGS OF AFFILIATES. Equity in earnings of affiliates (before
income taxes) decreased $211 million, or 91%, to $21 million in 1999 from $232
million in 1998. Equity in earnings of affiliates includes foreign currency
transaction losses of $203 million and $59 million in 1999 and 1998,
respectively. Excluding foreign currency transaction losses, equity in earnings
of affiliates decreased 23%. The overall decline in equity in earnings of
affiliates resulted from the decrease in equity in earnings of distribution
investments offset by an increase in equity in earnings of generation
investments.
Equity in earnings of generation affiliates increased $19 million, or 58%, to
$52 million in 1999 from $33 million in 1998. The increase is due primarily to
the Company's 1999 investment in OPGC.
Equity in earnings of distribution affiliates decreased $230 million to a
loss of $31 million in 1999 from earnings of $199 million in 1998. All of the
Company's equity investments in distribution businesses are in Brazil, and
they were negatively impacted by the devaluation of the Brazilian Real during
1999.
INCOME TAXES. Income taxes (including income taxes on equity in earnings)
decreased $34 million, or 23%, to $111 million in 1999 from $145 million in
1998. The Company's effective tax rate was 31% in 1999 and 32% in 1998.
MINORITY INTEREST. Minority interest decreased $30 million, or 32%, to $64
million in 1999 from $94 million in 1998. The increase in generation minority
interest was offset by a larger decrease in distribution minority interest,
resulting in the overall decrease.
Generation minority interest increased $14 million, or 50%, to $42 million in
1999 from $28 million in 1998. The increase in minority interest is due
primarily to the acquisition of control of two hydroelectric companies in
Panama in January 1999.
Distribution minority interest decreased $44 million, or 67%, to $22 million
in 1999 from $66 million in 1998. The decrease in minority interest is due
primarily to lower contributions from Cemig and Sul in 1999, both of which
were negatively impacted by the devaluation of the Brazilian Real during 1999.
EXTRAORDINARY ITEM. In 1999, the Company recorded a $17 million loss, net of
income taxes from the early extinguishment of corporate debt and project
financing debt at Placerita. In 1998, the Company recorded a $4 million gain,
net of income taxes from the early redemption of $18 million of 10.125% notes at
Chigen.
NET INCOME. Net income decreased $83 million, or 27%, to $228 million in 1999
from $311 million in 1998. The decrease in net income is due primarily to the
devaluation of the Brazilian Real and the resulting decline in equity in
earnings of affiliates in distribution businesses in Brazil. Excluding the $132
million of foreign currency transaction losses, net of income taxes, net income
increased $49 million in 1999.
1998 COMPARED TO 1997
REVENUES. Revenues increased $987 million, or 70%, to $2.40 billion in 1998 from
$1.41 billion in 1997. The increase in revenues is due primarily to the
acquisition of both new generation and distribution businesses, as well as from
the commercial operation of greenfield generation projects.
Generation revenues increased $303 million, or 27%, to $1.41 billion in 1998
and accounted for 31% of the Company's total increase in revenues in 1998.
Generation revenues increased due to the acquisition of Southland, as well as
the start of commercial operations at Barry and Pak Gen.
27
Distribution revenues increased $684 million, or 227%, to $985 million in 1998
and accounted for 69% of the Company's total increase in revenues in 1998. A
full year of operations at Eden, Edes and Sul combined with the acquisitions of
Edelap and Clesa resulted in the significant increase in distribution revenues.
GROSS MARGIN. Gross margin, which represents total revenues reduced by cost of
sales, increased $381 million, or 89%, to $811 million in 1998 from $430 million
in 1997. Gross margin as a percentage of revenues increased to 34% in 1998 from
30% in 1997. Both generation and distribution gross margin increased as a
percentage of revenues.
Generation gross margin increased $186 million, or 48%, to $576 million in 1998
from $390 million in 1997. Generation gross margin as a percentage of revenues
increased to 41% in 1998 from 35% in 1997. The increase in gross margin as a
percentage of revenues is due primarily to higher relative gross margins at
certain of the businesses acquired in 1998.
Distribution gross margin increased $195 million, or 488%, to $235 million in
1998 from $40 million in 1997. Distribution gross margin as a percentage of
revenues increased to 24% in 1998 from 13% in 1997. The increase in gross margin
is due primarily to improved margins at Eden, Edes and Sul, all of which were
acquired in 1997 and had their first full year of operations by the Company in
1998.
PROVISION TO REDUCE CONTRACT RECEIVABLES. The provision to reduce contract
receivables increased $5 million, or 29%, to $22 million in 1998 from $17
million in 1997. Additional provisions were recorded in the Dominican Republic
and in Kazakhstan.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11 million, or 24%, to $56 million in 1998
from $45 million in 1997. Selling, general and administrative expenses as a
percentage of revenues remained fairly constant at 2% in 1998 and 3% in 1997.
The increase is consistent with the Company's increased business development
activities.
INTEREST EXPENSE. Interest expense increased $241 million, or 99%, to $485
million in 1998 from $244 million in 1997. Interest expense as a percentage of
revenues increased to 20% in 1998 from 17% in 1997. Interest expense increased
primarily due to the interest at new businesses, as well as a full year of
interest on the senior debt and convertible subordinated debentures issued
during 1997.
INTEREST INCOME. Interest income increased $26 million, or 63%, to $67 million
in 1998 from $41 million in 1997. Interest income as a percentage of revenues
remained constant at 3% in both 1998 and 1997. Interest income increased
primarily due to interest income associated with late payments on customer
accounts at certain distribution businesses.
EQUITY IN EARNINGS OF AFFILIATES. Equity in earnings of affiliates (before
income taxes) increased $106 million, or 84%, to $232 million in 1998 from $126
million in 1997. The increase is due primarily to a full year of earnings in
equity investments made during 1997.
28
Equity in earnings of generation affiliates increased $12 million, or 57%, to
$33 million in 1998 from $21 million in 1997. The increase is due primarily to
additional earnings from the Company's investments in Medway and Elsta.
Equity in earnings of distribution affiliates increased $94 million, or 90%, to
$199 million in 1998 from $105 million in 1997. The increase is due primarily to
a full year of earnings from Cemig.
INCOME TAXES. Income taxes (including income taxes on equity in earnings)
increased $68 million, or 88%, to $145 million in 1998 from $77 million in 1997.
The Company's effective tax rate was 32% in 1998 and 29% in 1997. The lower rate
in 1997 was due primarily to a one-time tax benefit realized from the reduction
of statutory tax rates of certain foreign countries.
MINORITY INTEREST. Minority interest increased $75 million, or 395%, to $94
million in 1998 from $19 million in 1997. Both generation and distribution
minority interest increased during 1998.
Generation minority interest increased $18 million, or 180%, to $28 million in
1998 from $10 million in 1997. The increase in minority interest is due
primarily to the start of commercial operations at Pak Gen and Hefei, as well as
a full year of operations at Lal Pir.
Distribution minority interest increased $57 million, or 633%, to $66 million in
1998 from $9 million in 1997. The increase in minority interest is due primarily
to a full year of operations at Eden, Edes and Cemig.
EXTRAORDINARY ITEMS. The Company recorded extraordinary items in both 1998 and
1997 from the early extinguishment of debt. In 1998, the Company recorded a $4
million gain on the early redemption of $18 million of 10.125% notes at Chigen.
In 1997, the Company recorded a $3 million loss on the early redemption of its
$75 million 9.75% Senior Subordinated Notes due 2000.
NET INCOME. Net income increased $126 million, or 68%, to $311 million in 1998
from $185 million in 1997. The increase in net income is consistent with the
Company's increased activity in 1998. Net income as a percentage of revenues was
13% in both 1998 and 1997.
OUTLOOK
Global electricity markets continue to restructure and shift away from
government-owned and government-regulated electricity systems toward
deregulated, competitive market structures. Many countries have rewritten their
laws and regulations to allow foreign investment and private ownership of
electricity generation, transmission or distribution companies. Some countries
(for example Hungary, Brazil and some of the newly independent countries of the
former Soviet Union, among others) have or are in the process of "privatizing"
their electricity systems by selling all or part of such to private investors.
In addition, some companies are choosing to divest some or all of their
electricity generating assets. This global trend of electricity market
restructuring provides significant new business opportunities for companies like
AES.
In the United States, the federal government and some of the state government
regulatory agencies have also embraced the global trend encouraging liberalized
electricity markets. In particular, the federal
29
government has adopted regulations encouraging the establishment of wholesale
electricity markets by permitting generating facilities that sell their
electricity solely to wholesale customers to avoid regulation by state
utility commissions and sell their output at market based rates. The federal
government has also adopted regulations requiring utilities to transport
electricity generated by competitors on the same terms and conditions that
they apply to their own generation.
As a result, many regulated U.S. public utilities have begun to sell or auction
their generation capacity. Substantially all of the transmission and
distribution services in the U.S. continue to be regulated under a combined
state and Federal framework. As a result, the Company is subject in the United
States to a complex set of federal and state regulation, both directly through
regulations affecting the electricity business and indirectly through
environmental and other regulations that have an indirect effect upon the
business of generating and distributing electricity.
In addition, in those states and regions in which the Company owns generating
assets that sell electricity directly into power pools, the Company is subject
to a changing regulatory environment which may affect or influence the orderly
development of the applicable power pool. In some of these power pools the
oversight bodies have not adopted and/or finalized regulations governing the
operation of these markets and thus new laws and regulations may become
applicable to AES that may have an effect on our business or results of
operations.
In addition, many states have passed or are considering new legislation that
would permit utility customers to choose their electricity supplier in a
competitive electricity market (so-called "retail access" or "customer choice"
laws). While each state's plan differs in details, there are certain consistent
elements, including allowing customers to choose their electricity suppliers by
a certain date (the dates in the existing or proposed legislation vary between
1999 and 2003), allowing utilities to recover "stranded assets" (the remaining
costs of uneconomic generating or regulatory assets) and a reaffirmation of the
validity of contracts like the Company's U.S. contracts.
In addition to the potential for state restructuring legislation, several
competing bills have been proposed in the Congress to encourage customer choice
and recovery of stranded assets. Federal legislation might be needed to avoid
the conflicting effect of each state acting separately to pass restructuring
legislation (with the likely result of uneven market structures in neighboring
states). While it is uncertain whether or when Federal legislation dealing with
electricity restructuring might be passed, the Company believes that such
legislation would not likely have a negative effect on the Company's U.S.
business, and may create opportunities.
The Company's generation activities in the United States are subject to the
provisions of various laws and regulations, including, the Federal Power Act,
the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA") and the
Public Utility Holding Company Act of 1935, as amended ("PUHCA"). There is
legislation currently before the U.S. Congress to repeal part or all of the
current provisions of PURPA and PUHCA. The Company believes that if such
legislation is adopted, competition in the U.S. for new generation capacity from
vertically integrated utilities would increase. However, independents like AES
would also be free to acquire such utilities.
As consumers, regulators and suppliers continue the debate about how to further
decrease the regulatory aspects of providing electricity services, the Company
believes in and is encouraging the continued
30
orderly transition to a more competitive electricity market. Inherent in any
significant transition to competitive markets are risks associated with the
competitiveness of existing regulated enterprises, and as a result, their
ability to perform under long-term contracts such as the Company's
electricity sale contracts. Although AES strongly believes that its contracts
will be honored, there can be no assurance that each of its customers, in a
restructured and competitive environment, will be capable in all
circumstances of fulfilling their financial and legal obligations.
AES's investments and involvement in the development of new projects and the
acquisition of existing power plants and distribution companies in locations
outside the U.S. are increasing. The financing, development and operation of
such businesses may entail significant political and financial uncertainties and
other structuring issues (including uncertainties associated with the legal
environments including tax regulations, with first-time privatization efforts in
the countries involved, currency exchange rate fluctuations, currency
repatriation restrictions, currency inconvertibility, political instability,
civil unrest and, in severe cases, possible expropriation). Although AES
attempts to minimize these risks, these issues have the potential to cause
substantial delays or material impairment to the value of the project being
developed or business being operated.
It is also possible that as more of the world's markets move toward
competition, an increasing proportion of the Company's revenues may be
dependent on prices determined in electricity spot markets. In order to
capture a portion of the market share in competitive generation markets, AES
has in certain instances acquired or invested in low-cost "merchant" plants
(plants without long-term electricity sale contracts) in those markets. Such
an investment may require the Company (as well as its competitors) to make
larger equity contributions (as a percentage of the total capital or
acquisition cost) than the more traditional long-term contract-based
investments. Moreover, in some of these electricity markets, such as in the
United Kingdom, the regulatory authorities have proposed changes, that if
enacted, could restructure the way electricity is bought and sold and, as a
result, could adversely effect the Company's results of operations.
In addition, the Company has entered the new retail supply market, in some cases
as extensions of its generation or distribution businesses, and in other cases
as a separate business enterprise. The Company's retail businesses operate in a
new and developing market environment and hence there is considerable
uncertainty as to how quickly and significantly these markets will develop.
AES's business activities are subject to stringent environmental regulation by
relevant authorities at each location. Particularly in the United States, owners
and operators of coal fired generating facilities are under increasing scrutiny
from state and federal environmental authorities. If environmental laws or
regulations were to change in the future, or if the regulatory agencies with
oversight authority were to adopt new enforcement priorities under existing
laws, there can be no assurance that AES would be able to recover all or any
increased costs from its customers or that its business and financial condition
would not be materially and adversely affected. In addition, the Company or its
subsidiaries and affiliates may be required to make significant capital
expenditures in connection with environmental matters. AES is committed to
operating its businesses cleanly, safely and reliably and strives to comply with
all environmental laws, regulations, permits and licenses but, despite such
efforts, at times has been in non-compliance, although no such instance has
resulted in revocation of any permit or license.
31
FINANCIAL POSITION AND CASH FLOWS
At December 31, 1999, AES had consolidated working capital of $17 million as
compared to negative $722 million at the end of 1998. The increase in working
capital was due primarily to an increase in accounts receivable combined with a
decrease in the current portion of project financing debt. Accounts receivable
increased primarily from the acquisition of distribution businesses during 1999,
as well as from the acquisition of the Drax power station. The current portion
of project financing debt decreased because certain of the 1998 acquisitions
were financed with short-term debt that was refinanced, in part, with long-term
project financing during 1999.
Property, plant and equipment, net of accumulated depreciation, accounts for 64%
of the Company's total assets and was $13.4 billion at December 31, 1999. Net
property, plant and equipment increased $7.9 billion, or 143%, during 1999. The
increase was due primarily to the acquisitions completed during 1999. The
continuation of construction activities at the Company's greenfield projects
contributed to a much lesser extent to the overall increase. The Company also
recorded approximately $708 million of goodwill from its 1999 acquisitions of
CILCORP and NewEnergy.
In total, the Company's project financing debt and other notes payable increased
$5.4 billion, or 81%, to $12.0 billion at December 31, 1999. The increase is due
primarily to borrowings associated with the Company's 1999 acquisitions.
Borrowings used to fund the construction of the Company's green-field projects
contributed to a much lesser extent to the overall increase.
At December 31, 1999, the Company had $669 million of cash and cash
equivalents. Cash and cash equivalents increased $178 million due primarily
to the $197 million provided by operating activities. The $6.4 billion of
cash raised by financing activities was used to fund the $6.4 billion of
investing activities.
Cash flows provided by operating activities totaled $197 million during 1999.
The decrease in cash provided by operating activities during 1999 is due
primarily to the cash used for working capital as well as the decrease in net
income during 1999. Unrestricted net cash flow to the parent company, after cash
paid for general and administrative costs and project development expenses but
before investments and debt service, amounted to approximately $403 million for
the year ended December 31, 1999. The parent fixed charge ratio was
approximately 2.45x for the twelve months ended December 31, 1999. Net cash used
in investing activities totaled $6.4 billion during 1999. Approximately 89% of
the cash used in investing activities was used for acquisitions. Net cash
provided by financing activities was $6.4 billion during 1999, of which $5.1
billion was provided by net borrowings, $1.3 billion was provided by the sale of
common stock, $32 million was the net contribution from minority interests and
$44 million was used to repay other liabilities.
CAPITAL RESOURCES AND LIQUIDITY
AES's business is capital intensive and requires significant investments to
develop or acquire new operations. Occasionally, AES will also seek to refinance
certain outstanding project financing loans or other notes payable. Continued
access to capital on competitive and acceptable terms is therefore a significant
factor in the Company's ability to expand further. AES has, to the extent
practicable, utilized project financing loans to fund a significant portion of
the capital expenditures and investments required to construct and acquire its
electric power plants, distribution companies and related assets. Project
32
financing borrowings are substantially non-recourse to other subsidiaries and
affiliates and to AES as the parent company and are generally secured by the
capital stock, physical assets, contracts and cash flow of the related
subsidiary or affiliate.
The Company intends to continue to seek, where possible, such non-recourse
project financing in connection with the assets or businesses that the Company
or its affiliates may develop, construct or acquire. However, depending on
market conditions and the unique characteristics of individual businesses, the
Company's providers of project financing, particularly multinational commercial
banks or public market bond investors, may seek higher borrowing spreads and
increased equity contributions.
Furthermore, because of the reluctance of commercial lending institutions to
provide non-recourse project financing (including financial guarantees) for
businesses in certain less developed economies, the Company, in such locations,
has and will continue to seek direct or indirect (through credit support or
guarantees) project financing from a limited number of government sponsored,
multilateral or bilateral inter-national financial institutions or agencies. As
a pre-condition to making such project financing available, these institutions
may also require governmental guarantees of certain project and sovereign
related risks. Depending on the policies of specific governments, such
guarantees may not be offered, and as a result, AES may determine that
sufficient financing will ultimately not be available to fund the related
business, and may cease development or acquisition of such business, or
alternatively AES may choose to develop or acquire such business with higher
levels of corporate support than it has historically provided.
In addition to the project financing loans, if available, AES as the parent
company provides a portion, or in certain instances all, of the remaining
long-term financing required to fund development, construction or acquisition.
These investments have generally taken the form of equity investments or loans,
which are subordinated to the project financing loans. The funds for these
investments have been provided by cash flows from operations and by the proceeds
from issuances of debt, common stock and other securities issued by the Company.
Similarly, in certain of its distribution supply businesses, the Company may
provide financial guarantees or other credit support for the benefit of
counterparties who have entered into contracts for the purchase or sale of
electricity with the Company's subsidiaries. In such circumstances, were a
subsidiary to default on a payment or supply obligation, the Company would be
responsible for its subsidiary's obligations up to the amount provided for in
the relevant guarantee or other credit support.
Interim needs for shorter-term and working capital financing at the parent
company have been met with borrowings under AES's Revolver and Letter of Credit
Facility. The Company currently maintains a $600 million credit line under the
Revolver and, in 1999 entered into a $250 million Letter of Credit Facility. The
Revolver also includes financial covenants related to net worth, cash flow,
investments, financial leverage and certain other obligations and imitations on
cash dividends. At December 31, 1999, cash borrowings and letters of credit
outstanding under the Revolver amounted to $335 million and $200 million,
respectively and letters of credit out-standing under the Letter of Credit
Facility amounted to $214 million. The Company may also seek from time to time
to meet some of its short-term and interim funding needs with additional
commitments from banks and other financial institutions at the parent or
subsidiary level.
33
The ability of AES's subsidiaries and affiliates to declare and pay dividends to
AES is restricted under the terms of existing project financing debt agreements.
See Note 6 to the consolidated financial statements for additional information.
In connection with its project financings and related contracts, AES has
expressly undertaken certain limited obligations and contingent liabilities,
most of which will only be effective or will be terminated upon the occurrence
of future events. AES's obligations and contingent liabilities in certain cases
take the form of, or are supported by, letters of credit. These obligations and
contingent liabilities, excluding future commitments to invest and those
collateralized with letter of credit obligations under the Revolver, were
limited by their terms as of December 31, 1999, to an aggregate of approximately
$585 million. The Company is obligated under other contingent liabilities which
are limited to amounts, or percentages of amounts, received by AES as
distributions from its project subsidiaries. These contingent liabilities
aggregated $33 million as of December 31, 1999. In addition, AES has expressly
undertaken certain other contingent obligations which the Company does not
expect to have a material adverse effect on its results of operations or
financial position, but which by their terms are not capped at a dollar amount.
Because each of the Company's businesses are distinct entities and
geographically diverse and because the obligations related to a single business
are based on contingencies of varying types, the Company believes it is unlikely
that it will be called upon to perform under several of such obligations at any
one time.
At December 31, 1999, the Company and its subsidiaries have future commitments
to fund investments in its projects under construction and in development of
$175 million. Of this amount, $50 million in letters of credit under the
Revolver have been issued to support a portion of these obligations. The
remaining future capital commitments are expected to be funded by
internally-generated cash flows and by external financings as may be necessary.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISKS
The Company generally attempts to hedge certain aspects of its projects against
the effects of fluctuations in inflation, interest rates, energy prices, and in
certain instances, exchange rates. Because of the complexity of hedging
strategies and the diverse nature of AES's operations, its results, although
significantly hedged, will likely be somewhat and in certain cases, such as
Brazil, materially affected by fluctuations in these variables and such
fluctuations may result in material improvement or deterioration of operating
results. Results of operations would generally improve with higher oil and
natural gas prices and with lower interest rates. Operating results are also
sensitive to the difference between inflation and interest rates, and would
generally improve when increases in inflation are higher than increases in
interest rates.
AES has generally structured the energy payments under its power generation
sales contracts to adjust with similar price indices as do its contracts with
the fuel suppliers for the corresponding power plants. In some cases a portion
of revenues is associated with operations and maintenance costs, and as such is
usually indexed to adjust with inflation.
AES primarily consists of businesses with long-term contracts or retail sales
concessions. While the contract-based portfolio is expected to be an effective
hedge against future energy and electricity market price risks, an increasing
proportion of AES's current and expected future revenues (particularly those
related to certain portions of its generation businesses in Kazakhstan, the UK,
Argentina, and the United States) are derived from businesses without
significant long-term revenue contracts. In some of these
34
businesses, AES has taken additional steps to improve their predictability,
in the Company's opinion, by using other contractual hedging provisions such
as financially settled electricity swaps or entering into fuel supply
contracts that absorb a significant portion of the variability in electricity
sales prices. Despite these mitigating factors, increasing reliance on
non-contract businesses in AES's portfolio subjects the Company's results of
operations to the volatility and unpredictability of electricity prices in
competitive markets.
The hedging approaches and methodologies utilized by the Company are implemented
through contractual provisions with fuel suppliers, international financial
institutions and several of the Company's customers. As a result, their
effectiveness is dependent, in part, on each counterparty's ability to perform
in accordance with the provisions of the relevant contract. The Company has
sought to reduce this credit risk in part by entering into contracts, where
possible, with creditworthy organizations. In certain instances, where the
Company determines that additional credit support is necessary, AES will seek to
execute (either concurrently or subsequently) stand-by, guarantee or option
agreements with creditworthy third parties. In particular, AES has executed and
is the beneficiary of fuel purchase option agreements, corporate and
governmental guarantees to support the obligations of local fuel suppliers in
several locations and sovereign governmental guarantees supporting the
electricity purchase obligation of government-owned power authorities, such as
in the Dominican Republic and Pakistan. AES has also used a hedging strategy in
an attempt to insulate each plant's financial performance, where appropriate,
against the risk of fluctuations in interest rates. Depending on whether
capacity payments are fixed or vary with inflation, the Company generally
attempts to hedge against interest rate fluctuations by arranging fixed rate or
variable rate financing, respectively. In certain cases, the Company executes
interest rate swap, cap and floor agreements to effectively fix or limit the
interest rate exposure on the underlying variable rate financing. At December
31, 1999, the Company and its subsidiaries had approximately $4,820 million of
fixed rate debt obligations.
In addition, the Company had entered into interest rate swap agreements and
forward interest rate swap agreements aggregating approximately $1,083 million
at December 31, 1999, which the Company used to hedge its interest rate exposure
on variable rate debt. Through its equity investments in foreign subsidiaries
and affiliates, AES operates in jurisdictions dealing in currencies other than
the Company's consolidated reporting currency, the U.S. Dollar. Such investments
and advances were made to fund capital investment or acquisition requirements,
to provide working capital, or to provide collateral for contingent obligations.
Due primarily to the long-term nature of certain investments and advances, the
Company accounts for any adjustments resulting from translation as a charge or
credit directly to a separate component of stockholders' equity until such time
as the Company realizes such charge or credit. At that time, differences may be
recognized in the statement of operations as gains or losses. In addition,
certain of the Company's foreign subsidiaries and affiliates have entered into
monetary obligations in U. S. Dollars or currencies other than their own
functional currencies. When monetary assets or obligations are incurred in a
currency other than a foreign subsidiary's or affiliate's functional currency,
that entity may be exposed to reporting foreign currency transaction gains or
losses based on fluctuations between the relative value of that entity's
functional currency and the currency of the monetary asset or liability.
Whenever possible, these subsidiaries have attempted to limit potential foreign
exchange exposure by entering into revenue contracts which adjust to changes in
the foreign exchange rates. Certain foreign affiliates and subsidiaries operate
in countries where the local inflation rates are greater than U.S. inflation
rates. In such cases the foreign currency tends to devalue relative to the U.S.
Dollar over time. The Company's subsidiaries and affiliates have entered into
revenue contracts which attempt to adjust for these differences; however, there
can be no assurance that such adjustments will compensate for the full effects
of currency devaluation, if any.
35
As discussed in "Results of Operations," the Brazilian Real experienced a
significant devaluation in early 1999. As a result, the Brazilian Businesses
experienced non-cash, foreign currency transaction losses associated with the
impact of changes in the value of the Brazilian Real on the foreign currency
(non-functional currency) denominated debt (primarily U.S. Dollars) within
the Brazilian Businesses. The Company recorded $203 million of noncash
foreign currency transaction losses (before income taxes) arising from its
investments in Brazilian subsidiaries and affiliates during 1999. In
addition, such devaluation resulted in a related increase of approximately
$666 million in the balance of the cumulative foreign currency translation
adjustment reflected as a reduction of stockholders' equity; as well as a
corresponding reduction in the carrying value of the related assets. The
table on the next page provides information about the Company's financial
instruments and derivative financial instruments that are sensitive to
changes in interest rates, in particular, debt obligations, trust preferred
securities, and interest rate swaps. AES does not trade in these financial
instruments and derivatives and therefore has classified them as other than
trading. For debt obligations and trust preferred securities, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates over the next five years and thereafter. For interest
rate swaps, the table presents aggregate contractual notional amounts and
weighted average interest rates over the next five years. Notional amounts
are used to calculate the contractual payments to be exchanged under the
contract. Weighted average variable rates are based on implied forward rates
in the yield curve at December 31, 1999. The information is presented in U.S.
Dollar equivalents, which is the Company's reporting currency. The
instruments' actual cash flows are denominated in U.S. Dollars (USD),
Japanese Yen (JPY), Australian Dollars (AUD), Chinese Renminbi Yuan (CHY), UK
Pounds Sterling (GBP), Indian Rupees (INR), Argentine Pesos (ARS), Brazilian
Real (BRL), Hungarian Forints (HUF), and German Marks (DEM) as indicated in
parentheses as of December 31, 1999.
36
FINANCIAL INSTRUMENTS
FAIR
THERE- TOTAL TOTAL VALUE
DECEMBER 31, 2000 2001 2002 2003 2004 AFTER 1999 1998 1999
Liabilities (USD Equivalents in millions, except interest rates)
By expected maturity date
Long-Term Debt:
Fixed Rate (USD) $ 115 $ 90 $ 56 $ 85 $ 67 $3,757 $ 4,170 $2,396 $ 4,142
Average Interest Rate 8.7 % 9.2 % 9.1 % 8.4 % 9.1 % 8.8 % 8.8 % 8.9 %
Variable Rate (USD) 867 221 980 200 204 1,337 3,809 3,509 3,809
Average Interest Rate 8.9 % 8.8 % 11.2 % 7.8 % 7.6 % 7.6 % 8.9 % 7.3 %
Fixed Rate (JPY) 7 7 8 8 8 19 57 58 57
Average Interest Rate 2.5 % 2.5 % 2.5 % 2.5 % 2.5 % 2.5 % 2.5 % 2.5 %
Variable Rate (JPY) 31 31 31 32 32 78 235 236 235
Average Interest Rate 3.0 % 3.0 % 3.0 % 3.0 % 3.0 % 3.0 % 3.0 % 3.5 %
Fixed Rate (GBP) - - - - - 404 404 - 404
Average Interest Rate - - - - - 9.0 % 9.0 % -
Variable Rate (GBP) 89 135 160 160 167 1,768 2,479 183 2,479
Average Interest Rate 7.8 % 7.8 % 7.8 % 7.8 % 7.8 % 7.8 % 7.8 % 7.2 %
Fixed Rate (BRL) 54 48 45 45 45 394 631 - 631
Average Interest Rate 12.1 % 11.3 % 10.0 % 10.0 % 10.0 % 10.3 % 10.4 % -
Fixed Rate (AUD) - - - - 2 79 81 - 73
Average Interest Rate - - - - 7.7 % 7.7 % 7.7 % -
Variable Rate (AUD) 4 4 5 6 6 30 55 57 55
Average Interest Rate 7.4 % 7.4 % 7.4 % 7.4 % 7.4 % 7.4 % 7.4 % 7.1 %
Fixed Rate (CHY) 10 4 4 6 - 4 28 3 28
Average Interest Rate 10.4 % 16.1 % 16.1 % 16.1 % - 16.1 % 14.1 % 7.5 %
Fixed Rate (ARS) 36 - - - - - 36 - 36
Average Interest Rate 11.0 % - - - - - 11.0 % -
Variable Rate (ARS) 3 2 - - - - 5 - 5
Average Interest Rate 10.1 % 10.1 % - - - - 10.1 % -
Fixed Rate (INR) - 44 - - - - 44 48 39
Average Interest Rate - 12.9 % - - - - 12.9 % 13.9 %
Variable Rate (HUF) - - - - - - - 2 -
Average Interest Rate - - - - - - - 17.5 %
Variable Rate (DEM) - - - - - - - 26 -
Average Interest Rate - - - - - - - 4.6 %
---- ----- ----- ----- ----- ----- -------- ----
Total $1,216 $ 586 $1,289 $ 542 $ 531 $7,870 $12,034 $6,518 $11,993
====== ===== ====== ===== ===== ====== ======= ====== =======
Trust Preferred Securities
By expected maturity date
Fixed Rate (USD) - - - - - 1,318 1,318 550 1,770
Average Interest Rate - - - - - 6.6 % 6.6 % 5.4 %
37
FAIR
DECEMBER 31, 1999 2000 2001 2002 2003 2004 VALUE
Interest Rate Swaps (USD Equivalents in millions, except interest rates)
By aggregate notional amounts
Variable to Fixed (USD) $ 850 $ 894 $ 837 $ 771 $ 707 $ 646 $(19)
Average pay rate 6.57 % 6.52 % 6.45 % 6.37 % 6.28 % 6.17 %
Average receive rate 6.10 % 6.10 % 6.10 % 6.10 % 6.10 % 6.10 %
Variable to Fixed (GBP) 181 181 181 181 181 178 4
Average pay rate 6.15 % 6.15 % 6.15 % 6.15 % 6.15 % 6.15 %
Average receive rate 5.95 % 6.30 % 6.30 % 6.35 % 6.37 % 6.37 %
Variable to Fixed (AUD) 52 48 35 31 28 23 (1)
Average pay rate 7.38 % 7.38 % 7.38 % 7.38 % 7.38 % 7.38 %
Average receive rate 7.05 % 7.05 % 7.05 % 7.05 % 7.05 % 7.05 %
------ ------ ------ ----- ----- ----- ----
$1,083 $1,123 $1,053 $ 983 $ 916 $ 847 $(16)
====== ====== ====== ===== ===== ===== ====
The table below provides information about the Company's financial instruments
by functional currency and presents such information in U.S. Dollar equivalents.
The table summarizes information on instruments that are sensitive to foreign
currency exchange rates. These instruments are debt obligations of the Company's
subsidiaries which are denominated in currencies other than that subsidiary's
functional currency. AES does not trade in these financial instruments and
therefore has classified them as other than trading. Such functional currencies
include the Argentine Peso (ARS), the Pakistan Rupee (PKR), the Brazilian Real
(BRR), the Kazakhstan Tenge (KZT), the Mexican Peso (MXP) and the U.S. Dollar
(USD). For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates for the next five
years and thereafter.
38
FINANCIAL INSTRUMENTS FAIR
THERE- TOTAL TOTAL VALUE
DECEMBER 31, 2000 2001 2002 2003 2004 AFTER 1999 1998 1999
Liabilities (USD Equivalents in
millions, except interest rates)
Long-Term Debt:
By expected maturity dates
ARS Functional Currency:
Fixed rate (USD) $ 49 $ 10 $ - $ - $ - $ - $ 59 $ 105 $ 59
Average interest rate 9.8 % 10.1 % - - - - 9.8 % 9.4 %
Variable rate (USD) 229 47 71 - - - 347 7 347
Average interest rate 11.1 % 11.7 % 11.0 % - - - 11.1 % 10.1 %
PKR Functional Currency:
Fixed rate (USD) 7 7 8 8 8 33 71 78 69
Average interest rate 8.6 % 8.7 % 8.8 % 8.9 % 9.0 % 9.8 % 9.2 % 9.5 %
Variable rate (USD) 6 7 7 7 7 25 59 65 59
Average interest rate 8.9 % 8.9 % 8.9 % 8.9 % 8.9 % 9.1 % 9.0 % 8.5 %
Fixed rate (JPY) 7 7 8 8 8 19 57 57 57
Average interest rate 2.5 % 2.5 % 2.5 % 2.5 % 2.5 % 2.5 % 2.5 % 2.5 %
Variable rate (JPY) 31 31 31 32 32 78 235 236 235
Average interest rate 3.0 % 3.0 % 3.0 % 3.0 % 3.0 % 3.0 % 3.0 % 3.5 %
BRR Functional Currency:
Variable rate (USD) 25 42 42 42 41 - 192 - 192
Average interest rate 9.0 % 8.5 % 8.5 % 8.5 % 8.5 % - 8.6 % -
KZT Functional Currency:
Variable rate (USD) 2 - - - - - 2 - 2
Average interest rate 7.0 % - - - - - 7.0 % -
MXP Functional Currency:
Variable rate (USD) - 11 11 12 12 102 148 - 148
Average interest rate - 7.4 % 7.4 % 7.4 % 7.4 % 7.6% 7.5 % -
USD Functional Currency:
Fixed rate (CHY) 10 4 4 6 - 4 28 - 28
Average interest rate 10.1 % 16.1 % 16.1 % 16.1 % - 16.1 % 14.0 % -
Variable rate (DEM) - - - - - - - 26
Average interest rate - - - - - - - 4.6 -
----- ----- ----- ----- ---- ----- ------ ----- -----
Total $ 366 $ 166 $ 182 $ 115 $108 $ 261 $1,198 $ 574 $1,196
===== ===== ===== ===== ==== ===== ====== ===== ======
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of The AES Corporation:
We have audited the accompanying consolidated balance sheets of The AES
Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedules
listed in the Index on page S-1. These financial statements and financial
statement schedules are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The AES Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
McLean, VA
February 3, 2000
(February 22, 2000, as to the last paragraph of Note 2)
40
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN MILLIONS, EXCEPT SHARES AND PAR VALUE)
- -------------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 669 $ 491
Short-term investments 164 35
Accounts receivable - net of reserves of $104 - 1999; $59 - 1998 934 365
Inventory 307 119
Receivable from affiliates 2 18
Deferred income taxes 184 71
Prepaid expenses and other current assets 327 155
------- -------
Total current assets 2,587 1,254
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 216 135
Electric generation and distribution assets 12,552 5,301
Accumulated depreciation and amortization (763) (525)
Construction in progress 1,442 634
------- -------
Property, plant, and equipment - net 13,447 5,545
------- -------
OTHER ASSETS:
Deferred financing costs - net 236 167
Project development costs 53 103
Investments in and advances to affiliates 1,575 1,933
Debt service reserves and other deposits 328 205
Electricity sales concessions and contracts - net 1,056 1,280
Goodwill - net 795 66
Other assets 803 228
------- -------
Total other assets 4,846 3,982
------- -------
TOTAL $20,880 $10,781
------- -------
------- -------
See notes to consolidated financial statements.
41
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Accounts payable $ 381 $ 215
Accrued interest 218 113
Accrued and other liabilities 775 235
Other notes payable - current portion 335 8
Project financing debt - current portion 881 1,405
------- -------
Total current liabilities 2,570 1,976
------- -------
LONG-TERM LIABILITIES:
Project financing debt 8,651 3,597
Other notes payable 2,167 1,644
Deferred income taxes 1,787 268
Other long-term liabilities 602 220
------- -------
Total long-term liabilities 13,207 5,729
------- -------
MINORITY INTEREST 1,148 732
COMMITMENTS AND CONTINGENCIES (NOTE 7) - -
COMPANY-OBLIGATED CONVERTIBLE MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES 1,318 550
STOCKHOLDERS' EQUITY:
Preferred stock, no par value - 2 million shares authorized; none issued - -
Common stock, $.01 par value - 500 million shares authorized; shares
issued and outstanding, 1999 - 206.8 million; 1998 - 180.4 million 2 2
Additional paid-in capital 2,617 1,243
Retained earnings 1,120 892
Accumulated other comprehensive loss (1,102) (343)
------- -------
Total stockholders' equity 2,637 1,794
------- -------
TOTAL $20,880 $10,781
------- -------
------- -------
See notes to consolidated financial statements.
42
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
REVENUES $ 3,253 $ 2,398 $1,411
Cost of Sales (2,249) (1,587) (981)
Selling, General and Administrative Expenses (71) (56) (45)
Provision to Reduce Contract Receivables, net of recoveries (8) (22) (17)
Interest Expense (641) (485) (244)
Interest Income 77 67 41
Gain on Contract Buyout 91 - -
Impairment Loss (62) - -
Foreign Currency Exchange Gain (Loss) 9 (1) (7)
Equity in Pre-tax Earnings of Affiliates 21 232 126
------- ------- ------
INCOME BEFORE INCOME TAXES,
MINORITY INTEREST, AND
EXTRAORDINARY ITEM 420 546 284
Income Taxes 111 145 77
Minority Interest 64 94 19
------- ------- ------
INCOME BEFORE EXTRAORDINARY ITEM 245 307 188
Extraordinary items - (loss) gain on early extinguishment
of debt - net of applicable income tax (benefit)/expense (17) 4 (3)
------- ------- ------
NET INCOME $ 228 $ 311 $ 185
------- ------- ------
------- ------- ------
BASIC EARNINGS PER SHARE:
Before extraordinary items $ 1.28 $ 1.73 $ 1.13
Extraordinary items (0.09) 0.02 (0.02)
------- ------- ------
BASIC EARNINGS PER SHARE $ 1.19 $ 1.75 $ 1.11
------- ------- ------
------- ------- ------
DILUTED EARNINGS PER SHARE:
Before extraordinary items $ 1.25 $ 1.67 $ 1.11
Extraordinary items (0.09) 0.02 (0.02)
------- ------- ------
DILUTED EARNINGS PER SHARE $ 1.16 $ 1.69 $ 1.09
------- ------- ------
------- ------- ------
See notes to consolidated financial statements.
43
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 228 $ 311 $ 185
Adjustments to net income:
Depreciation and amortization 278 196 114
Impairment loss 62 - -
Provision for deferred taxes - net of equity investee taxes (195) 67 20
Undistributed earnings of affiliates - net of tax 43 (50) (57)
Other (8) (6) 22
Changes in consolidated working capital:
(Increase) in accounts receivable (142) (10) (99)
(Increase) in inventory (32) (8) (8)
(Increase) decrease in other current assets (95) 14 (29)
(Decrease) increase in accounts payable (49) (11) 97
Increase in accrued interest 86 45 43
Increase (decrease) in other current liabilities 21 (20) (95)
------- ------- -------
Net cash provided by operating activities 197 528 193
------- ------- -------
INVESTING ACTIVITIES:
Property additions (834) (517) (511)
Acquisitions - net of cash acquired (5,713) (1,623) (2,454)
Proceeds from the sales of assets 650 301 -
Sale of short-term investments 49 98 77
Purchase of short-term investments (98) (2) (184)
Affiliate advances and equity investments (193) (69) (649)
Increase in restricted cash (80) (4) -
Project development costs (84) (57) (34)
Debt service reserves and other assets (85) 31 (44)
------- ------- -------
Net cash used in investing activities (6,388) (1,842) (3,799)
------- ------- -------
(Continued)
44
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
FINANCING ACTIVITIES:
Borrowings/(repayments) under the revolver, net $ 102 $ 206 $ (186)
Issuance of project financing debt and other
coupon bearing securities 6,254 1,843 3,926
Repayments of project financing debt and other
coupon bearing securities (1,161) (668) (749)
Payments for deferred financing costs (119) (47) (34)
Repayments of other liabilities (44) (71) (6)
Contributions by minority interests, net 32 40 269
Proceeds from sale of common stock, net 1,305 200 503
------- ------- -------
Net cash provided by financing activities 6,369 1,503 3,723
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 178 189 117
CASH AND CASH EQUIVALENTS, BEGINNING 491 302 185
------- ------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 669 $ 491 $ 302
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest - net of amounts capitalized $ 548 $ 415 $ 201
Cash payments for income taxes - net of refunds 45 24 31
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Deferred purchase price of Cemig shares $ - $ - $ 528
Common stock issued for amalgamation of AES Chigen - - 157
Common stock issued for acquisition of NewEnergy 48 - -
Liabilities assumed in purchase transactions 3,570 139 485
(Concluded)
See notes to consolidated financial statements.
45
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ----------------------------------------------
(Amounts In Millions)
- ----------------------------------------------
Accumulated
Other
Common Stock Additional Compreh-
Paid-in Retained ensive Treasury Comprehensive
Shares Amount Capital Earnings Loss Stock Income (Loss)
------ ------- ------- -------- ------- ------ -------------
Balance at January 1, 1997 154.8 $ 2 $ 359 $ 396 $ (33) $ (3)
Net income -- -- -- 185 -- -- $ 185
Foreign currency translation adjustment -- -- -- -- (98) -- (98)
-------------
Comprehensive income $ 87
=============
Issuance of common stock through public offerings 14.1 -- 494 -- -- --
Issuance of common stock pursuant to Chigen
amalgamation 4.7 -- 157 -- -- --
Issuance of common stock under benefit plans
and exercise of stock options and warrants 1.4 -- 12 -- -- 2
Tax benefit associated with the exercise of options -- -- 8 -- -- --
------ ------- ------- -------- ------- ------
Balance at December 31, 1997 175.0 2 1,030 581 (131) (1)
------ ------- ------- -------- ------- ------
Net income -- -- -- 311 -- -- $ 311
Foreign currency translation adjustment -- -- -- -- (212) -- (212)
-------------
Comprehensive income $ 99
=============
Issuance of common stock through public offerings 4.3 -- 184 -- -- --
Issuance of common stock under benefit plans 1
and exercise of stock options and warrants 1.1 -- 16 -- -- --
Tax benefit associated with the exercise of options -- -- 13 -- -- --
------ ------- ------- -------- ------- ------
Balance at December 31, 1998 180.4 2 1,243 892 (343) --
------ ------- ------- -------- ------- ------
Net income -- -- -- 228 -- -- 228
Foreign currency translation adjustment -- -- -- -- (759) -- (759)
-------------
Comprehensive loss $(531)
=============
Issuance of common stock through public offerings 24.0 -- 1,280 -- -- --
Issuance of common stock pursuant to acquisition of
NewEnergy 0.9 -- 48 -- -- --
Issuance of common stock under benefit plans
and exercise of stock options and warrants 1.5 -- 25 -- -- --
Tax benefit associated with the exercise of options -- -- 21 --
------ ------- ------- -------- ------- ------
Balance at December 31, 1999 206.8 $ 2 $2,617 $1,120 $(1,102) $ --
------ ------- ------- -------- ------- ------
------ ------- ------- -------- ------- ------
THE AES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The AES Corporation and its subsidiaries and affiliates,
(collectively "AES" or "the Company") is a global power company primarily
engaged in owning and operating electric power generation and distribution
businesses in many countries around the world.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
of the Company include the accounts of The AES Corporation, its subsidiaries,
and controlled affiliates. Investments in 50% or less
46
owned affiliates, over which the Company has the ability to exercise
significant influence but not control, are accounted for using the equity
method. Intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers unrestricted cash
on hand, deposits in banks, certificates of deposit, and short-term
marketable securities with an original maturity of three months or less to be
cash and cash equivalents.
INVESTMENTS - Securities that the Company has both the positive
intent and ability to hold to maturity are classified as held-to-maturity and
are carried at historical cost. Other investments that the Company does not
intend to hold to maturity are classified as available-for-sale, and any
significant unrealized gains or losses are recorded as a separate component
of stockholders' equity. Interest and dividends on investments are reported
in interest income. Gains and losses on sales of investments are recorded
using the specific identification method. Short-term investments consist of
investments with original maturities in excess of three months but less than
one year. Debt service reserves and other deposits, which might otherwise be
considered cash and cash equivalents, are treated as noncurrent assets (see
Note 5).
INVENTORY - Inventory, valued at the lower of cost or market (first
in, first out method), consists of coal, fuel oil, raw materials, spare parts
and supplies. Inventory consists of the following (in millions):
DECEMBER 31,
-----------------
1999 1998
------ ------
Coal, fuel oil, and other raw materials $191 $ 63
Spare parts and supplies 116 56
------ ------
Total $307 $119
------ ------
------ ------
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment,
including improvements, is stated at cost. Depreciation, after consideration
of salvage value, is computed using the straight-line method over the
estimated composite lives of the assets, which range from 3 to 40 years.
Maintenance and repairs are charged to expense as incurred. Emergency and
rotable spare parts inventories are included in electric generation and
distribution assets and are depreciated over the useful life of the related
components.
CONSTRUCTION IN PROGRESS - Construction progress payments,
engineering costs, insurance costs, salaries, interest, and other costs
relating to construction in progress are capitalized. Construction in
progress balances are transferred to electric generation and distribution
assets when the assets are ready for their intended use. Interest capitalized
during development and construction totaled $104 million, $79 million, and
$67 million in 1999, 1998, and 1997, respectively.
INTANGIBLE ASSETS - Goodwill and electricity sales concessions and
contracts are amortized on a straight-line basis over their estimated periods
of benefit which range from 15 to 40 years. Intangible assets at December 31,
1999 and 1998 are shown net of accumulated amortization of $70 million and
$39 million, respectively.
LONG-LIVED ASSETS - In accordance with Statement of Financial
Accounting Standard (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company
evaluates the impairment of long-lived assets, including goodwill, based on
the projection of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be
recoverable. In the event such cash flows are not expected to be sufficient
to recover the recorded value of the assets, the assets are written down to
their estimated fair values (see Note 12).
DEFERRED FINANCING COSTS - Financing costs are deferred and
amortized over the related financing period using the effective interest
method or the straight-line method when it does not differ materially from
the effective interest method of amortization. Deferred financing costs are
shown net of accumulated amortization of $87 million and $70 million as of
December 31, 1999 and 1998, respectively.
PROJECT DEVELOPMENT COSTS - The Company capitalizes the costs of
developing new construction
47
projects after achieving certain project-related milestones that indicate
that the project is probable of completion. These costs represent amounts
incurred for professional services, permits, options, capitalized interest,
and other costs directly related to construction. These costs are transferred
to property when significant construction activity commences, or expensed at
the time the Company determines that a particular project will no longer be
developed. The continued capitalization of such costs is subject to ongoing
risks related to successful completion, including those related to government
approvals, siting, financing, construction, permitting, and contract
compliance.
INCOME TAXES - The Company follows SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of the existing assets and liabilities, and their respective income tax bases.
FOREIGN CURRENCY TRANSLATION - Subsidiaries and affiliates whose
functional currency is other than the U.S. Dollar translate their assets and
liabilities into U.S. Dollars at the current exchange rates in effect at the
end of the fiscal period. The revenue and expense accounts of such
subsidiaries and affiliates are translated into U.S. Dollars at the average
exchange rates that prevailed during the period. The gains or losses that
result from this process, and gains and losses on intercompany foreign
currency transactions which are long-term in nature, and which the Company
does not intend to settle in the foreseeable future, are shown in accumulated
other comprehensive loss in the stockholders' equity section of the balance
sheet. For subsidiaries operating in highly inflationary economies, the U.S.
Dollar is considered to be the functional currency, and transaction gains and
losses are included in determining net income. Gains and losses that arise
from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency, except those that are hedged, are
included in determining net income. Foreign currency gains and losses that
will likely be recovered through tariff adjustments as provided for in power
sales contracts are deferred and recognized as they are recovered under
contract terms.
During 1999, the Brazilian Real experienced a significant
devaluation relative to the U.S. Dollar, declining from 1.21 Reais to the
Dollar at December 31, 1998 to an average of 1.81 Reais to the Dollar for the
year ended December 31, 1999. This devaluation resulted in significant
foreign currency translation and transaction losses during 1999. The Company
recorded $203 million before income taxes of noncash foreign currency
transaction losses on its investments in Brazilian affiliates during 1999.
REVENUE RECOGNITION AND CONCENTRATION - Revenues from the sale of
electricity and steam are recorded based upon output delivered and capacity
provided at rates as specified under contract terms or prevailing market
rates. Electricity distribution revenues are recognized when power is
provided. Several of the Company's power plants rely primarily on one power
sales contract with a single customer for the majority of revenues. No single
customer accounted for at least 10% of revenues in 1999 or 1998. Three
customers accounted for 14%, 12%, and 10% of revenues in 1997. The prolonged
failure of any of the Company's customers to fulfill contractual obligations
or make required payments could have a substantial negative impact on AES's
revenues and profits.
REGULATION - The Company has investments in electric distribution
businesses located in the United States and certain foreign countries that
are subject to regulation by the applicable regulatory authority. For these
regulated businesses, assets and liabilities are recorded to represent
probable future increases and decreases of revenues resulting from the
rate-making actions of regulatory agencies. The Company has recorded assets
that result from rate regulation of $58 million at December 31, 1999. If a
regulator excludes all or part of a cost from recovery, the carrying amount
of the asset is reduced to the extent of the excluded cost. In addition,
electric rates of the distribution companies generally include a provision
that allows for the recovery of changes in the cost of purchased power, fuel
costs, and certain pass-through taxes. The net effects of any under or over
recoveries are recorded as a current asset or liability and adjusted by
collections through billings to customers. The Company has deferred costs of
$54 million and $9 million at December 31, 1999 and 1998, respectively, that
it expects to pass through to its customers in accordance with and
48
subject to provisions of the relevant concession agreements.
DERIVATIVES - The Company enters into various derivative
transactions in order to hedge its exposure to certain market risks. The
Company currently has outstanding interest rate swap, cap, and floor
agreements that hedge against interest rate exposure on floating rate project
financing debt. These transactions, which are classified as other than
trading, are accounted for using settlement accounting, and interest is
expensed or capitalized, as appropriate, using effective interest rates. Any
fees are amortized as yield adjustments. Written interest rate options are
marked-to-market through earnings.
The Company enters into electric and gas derivative instruments,
including swaps, options, forwards and futures contracts to manage its risks
related to electric and gas sales and purchases. Gains and losses arising
from derivative financial instrument transactions that hedge the impact of
fluctuations in energy prices are recognized in income concurrent with the
related purchases and sales of the commodity. If a derivative financial
instrument contract is terminated because it is probable that a transaction
or forecasted transaction will not occur, any gain or loss as of such date is
immediately recognized. If a derivative financial instrument contract is
terminated early for other economic reasons, any gain or loss as of the
termination date is deferred and recorded concurrently with the related
energy purchase or sale.
Certain electric derivative financial instruments are entered into
for trading purposes. Such derivatives are recorded at market value with
gains and losses reported net within cost of sales.
EARNINGS PER SHARE - Basic and diluted earnings per share are based
on the weighted average number of shares of common stock and potential common
stock outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive
stock options, warrants, deferred compensation arrangements, and convertible
securities. The effect of such potential common stock is computed using the
treasury stock method or the if converted method, as applicable.
COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the consolidated statements of changes in stockholders' equity
for all periods. The adoption of SFAS No. 130 had no impact on the previously
reported balances of stockholders' equity.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires the Company
to make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant items subject to such estimates and assumptions
include the carrying value of long-lived assets; valuation allowances for
receivables and deferred tax assets; environmental liabilities and potential
litigation claims and settlements (see Note 7).
RECLASSIFICATIONS - Certain reclassifications have been made to
prior-period amounts to conform with the 1999 presentation. In 1998, the
Company changed its method of reporting earnings from its equity affiliates
to a pre-tax basis. The Company's share of the investee's income taxes is
recorded in income tax expense. Amounts for 1997 have been reclassified to
conform to this presentation (see Note 4).
2. PURCHASE BUSINESS COMBINATIONS
In January 1999, a subsidiary of the Company acquired a 49% interest
in AES Panama, an entity resulting from the merger of Empresa de Generacion
Electrica Chiriqui (EGE Chiriqui) and Empresa de Generacion Electrica Bayano
(EGE Bayano), two generation companies in Panama with four facilities
representing a total of 283 MW. The acquisition was completed for
approximately $91 million, including $46 million of nonrecourse project
financing. AES controls the board of directors of AES Panama, and therefore,
consolidates it.
In July 1999, a subsidiary of the Company acquired all of the
outstanding shares of NewEnergy Ventures, Inc. (NewEnergy), a retail energy
distribution company, for approximately $90 million.
49
NewEnergy provides electric energy to customers in deregulated energy markets
in the U.S. The acquisition was financed through a combination of cash, debt
and approximately 864,000 shares of AES common stock. Approximately $135
million of goodwill was recorded, and it is being amortized over 20 years.
In August 1999, a subsidiary of the Company acquired a controlling
51% interest in Eletronet in Brazil for approximately $155 million. The
remaining 49% is owned by a subsidiary of Centrais Electricas Brasileiras,
S.A. (Eletrobras), a Brazilian government-owned utility. The purchase price
will be paid in installments through 2002. Eletronet was created in 1998 by
the minority owner to construct a national broadband telecommunications
network attached to the existing national transmission grid in Brazil. The
business activities of Eletronet currently represent construction activities,
preparing the network for its intended use. Therefore, no results of
operations have been included in the table below for this acquisition.
In August 1999, a subsidiary of the Company completed the
acquisition of 50% of Empresa Distribuidora de Electricidad del Este, S.A.
(EDE Este), for approximately $109 million. EDE Este is the distribution
company providing electricity to approximately 400,000 users in the eastern
portion of the Dominican Republic. Approximately $76 million of the
acquisition cost represents the value of the 40-year concession contracts
granted to EDE Este, and it is being amortized over 40 years. The Company
controls the board of directors, and therefore, consolidates EDE Este.
Also in August 1999, a subsidiary of AES acquired approximately 51%
of Central Electricity Supply Company of Orissa Limited (CESCO), an
electricity distribution company in the State of Orissa, India, for
approximately $10 million. In October 1999, a cyclone struck India including
the state of Orissa and damaged the transmission and distribution system of
CESCO. The damage will require additional capital improvements and will
extend the completion time for all of the expected improvements to be made at
CESCO.
In October 1999, a subsidiary of the Company acquired a controlling
interest in Companhia de Geracao de Energia Eletrica Tiete (Tiete), a
generating company in the State of Sao Paulo, Brazil, with 2,644 MW of
capacity comprised of nine hydroelectric generating facilities, for
approximately $498 million. AES acquired 62% of the voting stock which
represented approximately 39% of the total capital stock of Tiete.
In November 1999, a subsidiary of the Company completed its
acquisition of CILCORP for approximately $886 million in cash. CILCORP is an
integrated electric and gas utility based in Central Illinois that combines
two coal-fired generation plants producing an aggregate 1,157 MW of capacity
and an extensive transmission network that serves electricity and gas
customers. In August 1999, AES received from the Securities and Exchange
Commission an exemption from certain requirements of the Public Utility
Holding Company Act of 1935 allowing it to purchase CILCORP while maintaining
its existing ownership interest in its Qualifying Facilities, as defined
thereunder. Approximately $573 million of the purchase price represents
goodwill and is being amortized over 40 years.
In December 1999, a subsidiary of AES signed an agreement with the
Republic of Georgia to acquire control of three electric generating
facilities with a combined capacity of 823 MW. The purchase price for the
three facilities will be $11 million plus the assumption of approximately $80
million of long-term loans. This acquisition is expected to be completed
during 2000.
In January 1998, a subsidiary of AES acquired an additional 5.6%
ownership interest in the former Companhia Centro-Oeste de Distribuicao de
Energia Electrica (Sul), an electric distribution company in the state of Rio
Grande do Sul, Brazil. Previously, in October 1997, AES had acquired 90% of
Sul for approximately $1.4 billion. The additional investment in 1998 of
approximately $116 million increased AES's ownership interest in Sul to
95.6%. Approximately $507 million of the acquisition cost represents the
value of the 60-year electricity sales concession granted to Sul, which is
being amortized over 40 years.
In February 1998, a subsidiary of the Company acquired, for
approximately $97 million, 80% of Compania de Luz Electrica de Santa Ana
(Clesa), an electricity distribution company in El Salvador, and subsequently
sold 16% of its interest for approximately $15 million. At December 31, 1999,
the Company's ownership interest was 64%. Approximately $40 million of the
acquisition cost represents the value of the
50
electricity sales concession granted to Clesa, which has no expiration date,
and is being amortized over 40 years.
In April 1998, a subsidiary of AES acquired for no consideration a
45 MW hydroelectric plant (Caracoles) from the government of the San Juan
Province in Argentina. The project includes the operation of the plant under
a 30-year concession agreement, the refurbishment of the plant, and the
construction of a new 230 MW plant (Punta Negra) at the same site. The
construction of Punta Negra will be funded with cash flows from Caracoles as
well as cash contributions of approximately $139 million from the government
of San Juan. AES will operate the Punta Negra facility under a 30-year
concession agreement, at which time the facility will revert to the
government of San Juan.
In May 1998, a subsidiary of AES acquired three natural gas fired
electric generating stations (Southland) from Southern California Edison for
approximately $786 million. Approximately $45 million of the purchase price
represents goodwill and is being amortized over 40 years.
In June 1998, a subsidiary of AES acquired approximately 90% of
Empresa Distribuidora de La Plata S.A. (Edelap), an electric distribution
company in the province of Buenos Aires, Argentina for approximately $355
million, including assumed debt. In November 1998, the subsidiary sold
one-third of its 90% interest for approximately $61 million and a
pro-portionate percentage of related project debt (approximately $64
million). At December 31, 1999, the Company's ownership interest is 60%.
Approximately $123 million of the acquisition cost represents the value of
the 90 year electricity sales concession agreement, which is being amortized
over 40 years.
In late December 1998, the Company acquired a 75% interest in
Telasi, the electricity distribution company of Tbilisi, Republic of Georgia,
for approximately $26 million.
The table below presents supplemental unaudited pro forma operating
results as if all of the acquisitions had occurred at the beginning of the
period shown (in millions, except per share amounts):
YEARS ENDED DECEMBER 31, 1999 1998
Revenues 4,391 3,783
Income before extraordinary items 190 264
Net income 173 268
Basic earnings per share $0.90 $1.50
Diluted earnings per share $0.88 $1.46
For the year ended December 31, 1999, Income before extraordinary
items, Net income, Basic earnings per share and Diluted earnings per share
were reduced by a noncash charge of $132 million, net of tax, from foreign
currency transaction losses.
The pro forma results are based upon assumptions and estimates that
the Company believes are reasonable. The pro forma results do not purport to
be indicative of the results that actually would have been obtained had the
acquisitions occurred on January 1, 1998, nor are they intended to be a
projection of future results.
The Company's consolidated balance sheet as of December 31, 1999,
reflects these purchase business combinations. The consideration, consisting
of cash paid and common stock issued, totaled $2 billion. In conjunction with
these acquisitions, the Company recorded an additional $2.2 billion of
liabilities consisting mainly of the fair value of assumed liabilities.
The purchase price allocations for AES Panama, Tiete, EDE Este,
CESCO, NewEnergy, Eletronet and CILCORP have been completed on a preliminary
basis, subject to adjustments resulting from engineering, environmental, and
legal analyses during the respective allocation periods. The accompanying
51
financial statements include the operating results of AES Panama and Telasi
from January 1999, NewEnergy from July 1999, Eletronet and EDE Este from
August 1999, CESCO from October 1999, CILCORP and Tiete from November 1999,
Clesa from February 1998, Caracoles from April 1998, Southland from May 1998
and Edelap from June 1998.
On February 22, 2000, a subsidiary of the Company entered into an
agreement to acquire a 59% equity interest in a 1,000 MW hydroelectric
facility of Hidroeletrica Alicura S.A. (Alicura) in Argentina from Southern
Energy, Inc. Alicura was granted the concession to operate the 1,000 MW
peaking hydro facility located in the province of Neuquen, Argentina. The
purchase price of approximately $205 million includes the assumption of debt
support obligations. This transaction is subject to approval by the
anti-trust authorities of the Federal Government of Argentina.
3. ASSET ACQUISITIONS
In May 1999, a subsidiary of the Company acquired the assets of
Ecogen Energy which consists of two gas-fired power stations in Victoria,
Australia, for approximately $100 million. The power stations, Yarra and
Jeeralang, have a total installed capacity of 966 MW. They provide peaking
capacity for the Australian national electricity market.
Also in May 1999, a subsidiary of the Company completed the
acquisition of six electric generating stations from New York State Electric
and Gas (NYSEG) for approximately $962 million. Concurrently, the subsidiary
sold two of the plants to an unrelated third party for $650 million and
simultaneously entered into a leasing arrangement with the unrelated party
(see Note 7). These six coal-fired electric generating plants have a total
installed capacity of 1,424 MW.
In November 1999, a subsidiary of the Company completed its
acquisition of the Drax Power Station (Drax) for approximately $3 billion.
The Drax station is a 3,960 MW coal-fired power station in northern England.
The purchase price was paid in cash and was financed with a mixture of
nonrecourse senior bank lending, subordinated bridge lending and equity
provided by AES. In conjunction with this acquisition, the Company assumed
$1.3 billion of liabilities of which $1.1 billion relate to deferred income
taxes and the remainder consists of the fair value of assumed liabilities. In
connection with the acquisition, the Company assumed the liability of
National Power plc. under a defined benefit plan covering the existing
employees of the plant. The Company is currently in the process of computing
the unfunded pension obligation and the amount receivable from National Power
plc. related to this obligation. Any differences between these amounts will
result in an adjustment to the purchase price.
The Company's consolidated balance sheet as of December 31, 1999,
includes these asset acquisitions. In conjunction with these acquisitions,
the Company assumed $1.4 billion of liabilities, of which $1.1 billion relate
to deferred income taxes and the remainder consists of the fair value in
assumed liabilities.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company is a party to joint venture/consortium agreements
through which the Company has equity investments in several operating
companies. The joint venture/consortium parties generally share operational
control of the investee. The agreements prescribe ownership and voting
percentages as well as other matters. The Company records its share of
earnings from its equity investees on a pre-tax basis. The Company's share of
the investee's income taxes is recorded in income tax expense.
In May 1999, a subsidiary of the Company acquired subscription
rights from the Brazilian state controlled Eletrobras which allowed it to
purchase additional shares in Light-Servicos de Electricidade S.A. (Light)
and Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Eletropaulo).
Eletropaulo is a distribution company serving approximately 4 million
customers in the city of Sao Paulo, Brazil, and is controlled by Light. The
aggregate purchase price of the subscription rights and the underlying shares
in Light and Eletropaulo was approximately $53 million and $77 million,
respectively, and represents a 3.7%
52
and 4.4% economic ownership interest in their capital stock, respectively.
After purchase of the shares, subsidiaries of AES own approximately 17.7% of
Light common stock and 7.4% of Eletropaulo preferred stock.
In January 1998, a subsidiary of AES sold approximately 3.7% of its
equity investment in Companhia Energetica de Minas Gerais (Cemig), an
integrated electric utility serving the State of Minas Gerais in Brazil for
approximately $102 million. Cemig owns approximately 5,000 MW of generating
capacity and serves approximately 5 million customers. In June 1997, AES,
through a consortium acquired, for approximately $1 billion, a 14.41%
interest in Cemig. This investment represents a 33% voting interest. Through
the consortium, the Company has the ability to exercise significant influence
over the operations of Cemig and records the investment using the equity
method. After the January 1998 sale of a portion of its equity investment,
AES's net investment represents a 9.5% ownership interest in Cemig.
In late December 1998, a subsidiary of the Company acquired a 49%
interest in Orissa Power Generation Corporation (OPGC) a state government
owned company in India, for approximately $144 million. The remaining
interest is owned by the Orissa state government. OPGC owns and operates a
420 MW mine-mouth, coal-fired power station.
Amounts presented for 1999, 1998 and 1997 include the accounts of
Chigen affiliates and the following:
EQUITY OWNERSHIP
AT DECEMBER 31,
----------------------------
AFFILIATE COUNTRY 1999 1998 1997
Cemig Brazil 9.45% 9.45% 13.11%
Elsta Netherlands 50.00 50.00 50.00
Kingston Canada 50.00 50.00 50.00
Light Brazil 17.68 13.75 13.75
Medway Power, Ltd. United Kingdom 25.00 25.00 25.00
NIGEN United Kingdom 46.17 46.51 47.22
Northern/AES Energy United States 50.00 45.37 45.37
OPGC India 49.00 -- --
The following table represents summarized financial information (in
millions) for equity method affiliates on a combined 100% basis.
YEARS ENDED DECEMBER 31, 1999 1998 1997
Revenues $ 5,960 $ 8,091 $ 3,991
Operating income 1,839 2,079 984
Net income 62 1,146 670
Current assets 2,259 2,712 1,698
Noncurrent assets 15,359 19,025 14,800
Current liabilities 3,637 4,809 1,809
Noncurrent liabilities 7,536 7,356 4,752
Stockholders' equity 6,445 9,572 9,937
In 1999, the results of operations and the financial position of the
Brazilian affiliates, Light and Cemig, were negatively impacted by the
devaluation of the Brazilian Real.
The Company's after-tax share of undistributed earnings of
affiliates included in consolidated retained earnings was $96 million and
$139 million at December 31, 1999 and 1998, respectively. The Company charged
and recognized construction revenues, management fees, and interest on
advances to its affiliates, which aggregated $21 million, $19 million, and
$42 million for each of the years ended December 31, 1999, 1998 and 1997,
respectively.
53
In January 2000, a subsidiary of the Company acquired 59% of the
outstanding preferred shares of Eletropaulo representing 35.5% of the total
capital of Eletropaulo. The shares were purchased from BNDES Participacoes
S.A., the National Development Bank of Brazil, for an aggregate price of
approximately $1.1 billion which will be paid in four annual installments.
The Company's direct ownership interest in Eletropaulo is approximately 66.4%
of the total preferred stock outstanding and the Company's direct and
indirect (through its ownership of Light) economic interest is approximately
45%.
5. INVESTMENTS
The short-term investments and debt service reserves and other
deposits were invested as follows (in millions):
DECEMBER 31, 1999 1998
RESTRICTED CASH AND CASH EQUIVALENTS(1) $384 $108
----- -----
HELD-TO-MATURITY:
U.S. treasury and government agency securities 12 15
Foreign certificates of deposit -- 1
Commercial paper 91 95
----- -----
Subtotal 103 111
----- -----
AVAILABLE-FOR-SALE:
Commercial paper 5 21
----- -----
TOTAL $492 $240
----- -----
----- -----
(1) Amounts required to be maintained in cash in accordance with
certain covenants of various project financing agreements and lease contracts.
At December 31, 1999 and 1998, the Company's investments were
classified as either held-to-maturity or available-for-sale. The amortized
cost and estimated fair value of the investments at December 31, 1999 and
1998, classified as held-to-maturity and available-for-sale, were
approximately the same.
Short-term investments classified as held-to-maturity, and
available-for-sale, were $75 million and $5 million, respectively, at
December 31, 1999, and $16 million and $15 million, respectively, at December
31, 1998. Also included in short-term investments at December 31, 1999 and
1998 was restricted cash of approximately $84 million and $4 million,
respectively.
54
6. LONG-TERM DEBT
PROJECT FINANCING DEBT - Project financing debt at December 31,
1999, and 1998 consisted of the following (in millions):
DECEMBER 31,
INTEREST FINAL -----------------
RATE(1) MATURITY 1999 1998
VARIABLE RATE:
Bank loans 8.87% 2018 $5,081 $ 2,963
Commercial paper 7.02% 2008 561 291
Debt to (or guaranteed by)
multilateral or export credit agencies 6.13 2017 564 515
Other 9.94 2013 673 54
FIXED RATE:
Bank loans 9.16 2013 1,176 689
Notes and bonds 8.65 2029 1,304 236
Debt to (or guaranteed by) multilateral
or export credit agencies 6.25 2008 128 135
Other 12.64 2006 45 119
------- --------
SUBTOTAL 9,532 5,002
Less: Current maturities (881) (1,405)
------- --------
TOTAL $8,651 $ 3,597
------- --------
------- --------
(1) Weighted average interest rate at December 31, 1999.
Project financing debt borrowings are primarily collateralized by
the capital stock of the relevant subsidiary and in certain cases the
physical assets of, and all significant agreements associated with, such
business.
The Company has interest rate swap and forward interest rate swap
agreements in an aggregate notional principal amount of $1,083 million at
December 31, 1999. The swap agreements effectively change the variable
interest rates on the portion of the debt covered by the notional amounts to
weighted average fixed rates ranging from approximately 6.43% to 9.90%. The
agreements expire at various dates from 2003 through 2014. In the event of
nonperformance by the counterparties, the Company may be exposed to increased
interest rates; however, the Company does not anticipate nonperformance by
the counterparties, which are multinational financial institutions.
Certain commercial paper borrowings are supported by letters of
credit or lines of credit issued by various financial institutions. In the
event of nonperformance or credit deterioration of the institutions, the
Company may be exposed to the risk of higher effective interest rates. The
Company does not believe that such nonperformance or credit deterioration is
likely.
55
OTHER NOTES PAYABLE - Other notes payable at December 31, 1999 and
1998, consisted of the following (in millions):
INTEREST FINAL FIRST CALL
RATE MATURITY DATE 1999 1998
Corporate revolving bank loan(1) 8.50 % 2000 -- $ 335 $ 233
Senior notes 8.00 2008 2000 200 200
Senior notes 9.50 2009 1999 750 --
Senior subordinated notes 10.25 2006 2001 250 250
Senior subordinated notes 8.38 2007 2002 325 325
Senior subordinated notes 8.50 2007 2002 375 375
Senior subordinated debentures 8.88 2027 2004 125 125
Convertible junior subordinated notes 4.50 2005 2001 150 150
Unamortized discounts (8) (6)
------- -------
SUBTOTAL 2,502 1,652
Less: Current maturities (335) (8)
------- -------
TOTAL $2,167 $1,644
------- -------
------- -------
(1) Weighted average interest rate at December 31, 1999, on floating rate
loan.
Commitment fees on the unused portion of the $600 million corporate
revolving bank loan at December 31, 1999 are .50% per annum, and as of that
date $65 million was available. The Company's other notes payable are
unsecured obligations of the Company.
FUTURE MATURITIES OF DEBT - Scheduled maturities of total debt at
December 31, 1999, are (in millions):
2000 $ 1,216
2001 586
2002 1,289
2003 542
2004 531
Thereafter 7,870
-------
TOTAL $12,034
-------
-------
COVENANTS - The terms of the Company's revolving bank loan, senior
and junior subordinated notes, and project financing debt agreements contain
certain restrictive covenants. The covenants provide for, among other items,
maintenance of certain reserves, and require that minimum levels of working
capital, net worth, and certain financial ratio tests are met. The most
restrictive of these covenants include limitations on incurring additional
debt and on the payment of dividends to stockholders.
As of December 31, 1999, approximately $299 million of restricted
cash was maintained in accordance with certain covenants of the debt
agreements, and these amounts were included within short-term investments and
debt service reserves and other deposits in the consolidated balance sheet.
Various lender and governmental provisions restrict the ability of
the Company's subsidiaries to transfer assets to the parent company. Such
restricted assets amounted to approximately $5 billion at December 31, 1999.
56
7. COMMITMENTS, CONTINGENCIES AND RISKS
OPERATING LEASES - As of December 31, 1999, the Company was
obligated under long-term noncancelable operating leases, primarily for
office rental and site leases. Rental expense for operating leases, excluding
amounts related to the sale/leaseback discussed below, was $7 million, $4
million, and $6 million in the years ended December 31, 1999, 1998, and 1997,
respectively. The future minimum lease commitments under these leases are $11
million for 2000, $7 million for 2001, $6 million for 2002, $4 million for
2003, $4 million for 2004, and a total of $68 million for the years
thereafter.
SALE/LEASEBACK - In May 1999, a subsidiary of the Company acquired
six electric generating stations from NYSEG. Concurrently, the subsidiary
sold two of the plants to an unrelated third party for $650 million and
simultaneously entered into a leasing arrangement with the unrelated party.
This transaction has been accounted for as a sale/leaseback with operating
lease treatment. Rental expense was $26 million in 1999. Future minimum lease
commitments are $67 million for 2000, $58 million for 2001, $63 million for
2002, $58 million for 2003, $63 million for 2004 and a total of $1,436
million for the years thereafter.
In connection with the lease of the two power plants, the subsidiary
is required to maintain a rent reserve account equal to the maximum
semi-annual payment with respect to the sum of the basic rent and fixed
charges expected to become due in the immediately succeeding three-year
period. At December 31, 1999, the amount deposited in the rent reserve
account approximated $30 million. The amount is included in restricted cash
and can only be utilized to satisfy lease obligations.
The agreements governing the leases restrict the subsidiary's
ability to incur additional indebtedness, sell its assets or merge with
another entity. The ability of the subsidiary to make distributions is
restricted unless certain covenants, including the maintenance of certain
coverage ratios are met. The subsidiary is also required to maintain an
additional liquidity account initially equal to $65 million less the balance
of the rent reserve account. A letter of credit from a bank for $36 million
has been obtained to satisfy this requirement.
CONTRACTS - Operating subsidiaries of the Company have entered into
"take-or-pay" contracts for the purchase of electricity from third parties.
Purchases in 1999 were approximately $306 million. The future commitments
under these contracts are $323 million for 2000, $255 million for 2001, $227
million for 2002, $213 million for 2003, $198 million for 2004 and a total of
$1,170 million for the years thereafter.
Operating subsidiaries of the Company have entered into various
long-term contracts for the purchase of fuel (other than coal) subject to
termination only in certain limited circumstances. Purchases in 1999 were
approximately $63 million. The future commitments under contracts are $67
million for 2000, $64 million for 2001, $60 million for 2002, $39 million for
2003, $30 million for 2004, and $121 million thereafter.
Operating subsidiaries of the Company have entered into various
contracts for the purchase of coal. Purchases in 1999 were approximately $38
million. The future commitments under these contracts are $77 million for
2000, $62 million for 2001, $49 million for 2002, $20 million for 2003, $18
million for 2004, and $100 million for the years thereafter.
In connection with the acquisition of Ecogen Energy, the Company
assumed contingent liabilities related to the plants' performance. If plant
availability and contract performance specifications are not met, then the
Company may be required to make payments of up to $130 million to a third
party under the terms of an electricity hedge price agreement.
ENVIRONMENTAL - The Company has recorded liabilities for
environmental remediation associated with the acquisition of generation
plants in the state of New York during 1999 of approximately $15 million. As
of December 31, 1999, the Company has recorded cumulative liabilities
associated with acquired generation plants of approximately $42 million for
projected environmental remediation costs.
In October, 1999, a subsidiary of the Company received an
information request letter from the New York Attorney General, which seeks
detailed operating and maintenance history for certain plants. On January 13,
2000, a subsidiary of the Company received a subpoena from the New York State
Department of
57
Environmental Conservation seeking similar operating and maintenance history
for additional plants. This information is being sought in connection with
the Attorney General's and the Department of Environmental Conservation's
investigations of several electricity generating stations in New York that
are suspected of undertaking modifications in the past without undergoing an
air permitting review. If the Attorney General or the Department of
Environmental Conservation does file an enforcement action against the
Company, then penalties might be imposed and further emission reductions may
be necessary at these Plants.
The U.S. Environmental Protection Agency (EPA) has commenced an
industry-wide investigation of coal-fired electric power generators to
determine compliance with environmental requirements under the Clear Air Act
associated with repairs, maintenance, modifications and operational changes
made to the facilities over the years. The EPA's focus is on whether the
changes were subject to new source review or new performance standards, and
whether best available control technology was or should have been used. On
August 4, 1999, the EPA issued a notice of violation to one of the Company's
plants, generally alleging that the facility failed to obtain the necessary
permits in connection with certain changes made to the facility in the
mid-to-late 1980s. The Company does not believe that the ultimate resolution
of this issue will have a material adverse effect on its financial position
or results of operations.
Several of the Company's generating plants are subject to emission
regulations. The regulations may result in increased operating costs or the
purchase of additional pollution control equipment if emission levels are
exceeded.
The Company reviews its obligations as it relates to compliance with
environmental laws, including site restoration and remediation. Because of
the uncertainties associated with environmental assessment and remediation
activities, future costs of compliance or remediation could be higher or
lower than the amount currently accrued. Based on currently available
information, the Company does not believe that any costs incurred in excess
of those currently accrued will have a material effect on the financial
condition and results of operations of the Company.
DERIVATIVES - Certain subsidiaries and an affiliate of the Company
enter into interest rate, electric and gas derivative contracts with various
counterparties, and as a result, the Company is exposed to the risk of
nonperformance by its subsidiaries, affiliate, or counterparties. The Company
does not anticipate nonperformance by its subsidiaries, affiliate, or the
counterparties.
The Company is exposed to market risks on derivative contracts,
including those entered into for trading purposes, and on other unmatched
commitments to purchase and sell energy on a price and quantity basis. Such
market risks are monitored to limit the Company's exposure.
GUARANTEES - In connection with certain of its project financing,
acquisition, and power purchase agreements, AES has expressly undertaken
limited obligations and commitments, most of which will only be effective or
will be terminated upon the occurrence of future events. These obligations
and commitments, excluding those collateralized by letter-of-credit
obligations discussed below, were limited as of December 31, 1999, by the
terms of the agreements, to an aggregate of approximately $585 million. The
Company is also obligated under other commitments which are limited to
amounts, or percentages of amounts, received by AES as distributions from its
project subsidiaries. These amounts aggregated $33 million as of December 31,
1999. In addition, the Company has commitments to fund its equity in projects
currently under development or in construction. At December 31, 1999, such
commitments to invest amounted to approximately $125 million.
LETTERS OF CREDIT - At December 31, 1999, the Company had $414
million in letters of credit out-standing, which operate to guarantee
performance relating to certain project development activities and subsidiary
operations. The Company pays a letter-of-credit fee ranging from 0.875% to
2.5% on the outstanding amounts. In addition, the Company had $89 million in
surety bonds outstanding at December 31, 1999.
LITIGATION - In September 1999, an appellate judge in the Minas
Gerais, Brazil state court system granted a temporary injunction that
suspends the effectiveness of a shareholders' agreement for Cemig. This
58
appellate ruling suspends the shareholders' agreement while the action to
determine the validity of the shareholders' agreement is litigated in the
lower court. In early November 1999, the same appellate court judge reversed
this decision and reinstated the effectiveness of the shareholders'
agreement, but did not restore the super majority voting rights that
benefited the Company. AES must exhaust all state-level appeals before the
matter is heard before the Brazilian federal court. The Company intends to
vigorously pursue its legal rights in this matter and to restore all of its
rights regarding Cemig, and does not anticipate that this temporary
suspension of the shareholders' agreement will have a significant effect on
its financial condition or results of operations. AES continues to exercise
significant influence through representation on the Board of Directors and
the Consortium Agreement over Cemig and continues to account for its
investment in Cemig using the equity method.
The Company is involved in certain other legal proceedings in the
normal course of business. It is the opinion of the Company that none of the
pending litigation will have a material adverse effect on its results of
operations, financial position, or cash flows.
RISKS RELATED TO FOREIGN OPERATIONS - AES operates businesses in many
countries. There are certain economic, political, technological and
regulatory risks associated with operating in foreign countries. Certain of
the foreign businesses are subject to regulation that could limit electricity
tariff rates charged to customers. Investments in foreign countries may be
impacted by significant fluctuations in foreign currency exchange rates.
During 1999, the Company's financial position and results of operations were
adversely affected by a significant devaluation of the Brazilian Real
relative to the U.S. Dollar.
In certain locations, particularly developing countries or countries
that are in a transition from centrally-planned to market-oriented economies,
the electricity purchasers, both wholesale and retail, may be unable or
unwilling to honor their payment obligations. Collection of receivables may
be hindered in these countries due to ineffective systems for adjudicating
contract disputes.
In June 1999, a subsidiary of the Company assumed long-term
managerial and voting control of two regional electric distribution companies
(RECs) in Kazakhstan as part of a settlement of receivables outstanding from
the government of Kazakhstan. The Company's claim against the Government
approximated $220 million for electricity provided. The contractual rights to
control the operations of the RECs received in this transaction were valued
at approximately $26 million, based on the net present value of incremental
cash flows expected to be received as a result of operating the RECs. The two
distribution businesses serve approximately 1.8 million people. The Company
expects that the government of Kazakhstan will abide by the terms and periods
agreed to in the original memorandum of understanding that currently governs
the Company's operating control of the RECs. However, the contract is subject
to economic, political and regulatory risks associated with operating in
Kazakhstan.
LEVERAGED LEASE INVESTMENTS - One of the Company's subsidiaries has
investments in leveraged leases totaling $144 million. Related deferred tax
liabilities total $106 million. The investment includes estimated residual
values totaling $88 million. Leveraged lease residual value assumptions are
adjusted on a periodic basis, based on independent appraisals.
8. COMPANY-OBLIGATED CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS
During 1997, two wholly owned special purpose business trusts (AES
Trust I and AES Trust II) issued Term Convertible Securities (Tecons). On
March 31, 1997, AES Trust I issued 5 million of $2.6875 Tecons (liquidation
value $50) for total proceeds of $250 million and concurrently purchased $250
million of 5.375% junior subordinated convertible debentures due 2027 of AES
(individually the 5.375% Debentures). On October 29, 1997, AES Trust II
issued 6 million of $2.75 Tecons (liquidation value $50) for total proceeds
of $300 million and concurrently purchased $300 million of 5.5% junior
subordinated convertible debentures due 2012 of AES (individually the 5.5%
Debentures).
During 1999, AES Trust III, a wholly owned special purpose business
trust, issued 9 million of
59
$3.375 Tecons (liquidation value $50) for total proceeds of approximately
$518 million and concurrently purchased approximately $518 million of 6.75%
junior subordinated convertible debentures due 2029 (individually the 6.75%
Debentures and collectively with the 5.5% and the 5.375% Debentures, the
Junior Subordinated Debentures). The sole assets of AES Trust I, II and III
(collectively, the Tecon Trusts) are the Junior Subordinated Debentures.
AES, at its option, can redeem the 5.375% Debentures after March 31,
2000, which would result in the required redemption of the Tecons issued by
AES Trust I, for $51.68 per Tecon, reduced annually by $0.336 to a minimum of
$50 per Tecon and can redeem the 5.5% Debentures after September 30, 2000
which would result in the required redemption of the Tecons issued by AES
Trust II, for $51.72 per Tecon, reduced annually by $0.344 to a minimum of
$50 per Tecon and can redeem the 6.75% Debentures after October 17, 2002,
which would result in the required redemption of the Tecons issued by AES
Trust III, for $52.10 per Tecon, reduced annually by $0.422 to a minimum of
$50 per Tecon. The Tecons must be redeemed upon maturity of the debentures.
The Tecons are convertible into the common stock of AES at each
holder's option prior to March 31, 2027 for AES Trust I, September 30, 2012
for AES Trust II and October 15, 2029 for AES Trust III at the rate of
1.3812, 0.8914 and 0.7108, respectively, representing a conversion price to
$36.20, $56.09 and $70.341 per share respectively.
On November 30, 1999, three wholly owned special purpose business
trusts (individually, AES RHINOS Trust I, II, and III, collectively, the
Rhinos Trusts and with the Tecon Trusts, collectively the Trusts) issued
trust preferred securities (Rhinos). The aggregate amount of Rhinos issued
was approximately $250 million. Concurrent with the issuance of the Rhinos,
the Rhinos Trusts purchased approximately $258 million of junior subordinated
convertible notes due 2007. The Rhinos Trusts may be dissolved and the notes
distributed to the holders of the Rhinos at any time at the Company's option.
The obligations of the Trusts are fully and unconditionally guaranteed by AES.
Under the terms of a remarketing agreement, the initial purchaser of
the Rhinos has the right to cause a remarketing of the Rhinos if they remain
outstanding on November 30, 2002, or if certain other conditions are met.
In connection with the issuance of the Rhinos and related notes, the
Company has entered into a forward underwriting agreement for the future
placement of approximately $250 million of the Company's common stock,
preferred stock, notes or trust preferred securities.
Prior to a successful remarketing, the Rhinos are redeemable at par
in whole at any time or in part from the proceeds of a qualifying offering
under the forward underwriting commitment. The holder can require redemption
only at maturity (November 15, 2007).
Prior to February 28, 2003, the Rhinos are not convertible. On and
after February 28, 2003, the Rhinos are convertible at any time at the option
of the holder into the common stock of AES. The conversion price of the
Rhinos depends on whether or not the Trusts have completed a successful
remarketing of the Rhinos. Prior to a successful remarketing, the conversion
price is equal to the then current market price of the Company's common
stock. After a successful remarketing, the conversion price will be equal to
the price specified in the winning remarketing bid which cannot be less than
the current market price of AES common stock at the time of remarketing.
Dividends on the Tecons and Rhinos are payable quarterly at an
annual rate of 5.375% by AES Trust I, 5.5% by AES Trust II, 6.75% by AES
Trust III and LIBOR plus 2.50% by the Rhinos Trusts. Dividend rates for the
Rhinos are subject to increase upon a failed remarketing of the Rhinos. The
Trusts are each permitted to defer payment of dividends for up to 20
consecutive quarters, provided that the Company has exercised its right to
defer interest payments under the corresponding debentures or notes. During
such deferral periods, dividends on the Tecons and Rhinos will accumulate
quarterly and accrue interest and the Company may not declare or pay
dividends on its common stock.
Interest expense for each of the years ended December 31, 1999 and
1998, includes $14 million
60
related to the dividends accrued on the Tecons of AES Trust I and $17 million
related to AES Trust II. Interest expense for the year ended December 31,
1999 also includes $7 million related to AES Trust III and approximately $2
million related to the Rhinos Trusts.
9. MINORITY INTEREST
Minority interest includes $66 million of cumulative preferred stock
of a subsidiary. The total annual dividend requirement was $3 million at
December 31, 1999. $22 million of the preferred stock is subject to mandatory
redemption requirements over the period 2003-2008.
10. STOCKHOLDERS' EQUITY
SALE OF STOCK - In April 1999, the Company sold 10 million shares of
common stock at $51.25 per share. Net proceeds from the offering were $502
million. In October 1999, the Company sold 14 million shares of common stock
at $57.19 per share. Net proceeds from the offering were $778 million.
ACQUISITION OF NEWENERGY - During the third quarter of 1999, the
Company issued approximately 864,000 shares, valued at $48 million to fund
the acquisition of NewEnergy.
STOCK OPTIONS AND WARRANTS - The Company has granted options to
purchase shares of common stock under its stock option plans. Under the terms
of the plans, the Company may issue options to purchase shares of the
Company's common stock at a price equal to 100% of the market price at the
date the option is granted. The options become eligible for exercise under
various schedules. At December 31, 1999, there were approximately 2.1 million
shares reserved for future grants under the plans.
A summary of the option activity follows (in thousands of shares):
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding - beginning of year 7,926 $14.10 8,896 $13.29 8,020 $ 9.30
Exercised during the year (1,303) 10.96 (1,043) 8.60 (941) 7.78
Forfeited during the year (7) 43.65 (10) 31.99 (58) 11.23
Granted during the year 1,188(1) 38.75 83 34.36 999 34.42
Conversion of Chigen options -- -- -- -- 876 19.67
------- ------- ------- ------- ------- -------
Outstanding - end of year 7,804 18.35 7,926 14.10 8,896 13.29
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Eligible for exercise - end of year 6,506 $15.06 6,855 $12.54 6,163 $ 9.37
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
(1) Additional stock options for 1999 performance were granted in February
2000. The Company issued approximately 1.5 million options to purchase shares
at a price of $72 5/8 per share.
61
The following table summarizes information about stock options
outstanding at December 31, 1999 (in thousands of shares):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF TOTAL REMAINING LIFE EXERCISE TOTAL EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
$0.78 - $3.24 944 1.0 $ 3.19 944 $ 3.19
$3.25 - $9.88 1,632 4.1 8.90 1,515 8.86
$9.89 - $14.40 1,794 5.4 10.42 1,794 10.42
$14.41 - $22.85 1,254 6.3 20.56 1,249 20.56
$22.86 - $58.00 2,172 8.3 37.15 1,004 36.99
$58.01 - $80.00 8 9.7 60.97 -- --
----- ----- ------ ----- ------
TOTAL 7,804 5.5 $18.35 6,506 $15.06
----- ----- ------ ----- ------
----- ----- ------ ----- ------
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, for disclosure purposes. No compensation expense has been
recognized in connection with the options, as all options have been granted
only to AES people, including Directors, with an exercise price equal to the
market price of the Company's common stock on the date of grant. For SFAS No.
123 disclosure purposes, the weighted average fair value of each option grant
has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
FOR THE YEARS ENDED
----------------------
1999 1998 1997
Interest rate (risk-free) 6.5% 4.7% 5.9%
Volatility 46% 47% 37%
Using these assumptions, an expected option life of 7 years and a
dividend yield of zero, the weighted average fair value of each stock option
granted was $22.97, $19.02 and $17.86, for the years ended December 31, 1999,
1998 and 1997, respectively.
Had compensation expense been determined under the provisions of
SFAS No. 123, utilizing the assumptions detailed in the preceding paragraph,
the Company's net income and earnings per share for the years ended December
31, 1999, 1998 and 1997 would have been reduced to the following pro forma
amounts (in millions except per share amounts):
62
FOR THE YEARS ENDED
-------------------------
1999 1998 1997
NET INCOME:
As reported $ 228 $ 311 $ 185
Pro forma 213 301 174
BASIC EARNINGS PER SHARE:
As reported $1.19 $1.75 $1.11
Pro forma 1.11 1.70 1.04
DILUTED EARNINGS PER SHARE:
As reported $1.16 $1.69 $1.09
Pro forma 1.08 1.64 1.03
The disclosures of such amounts and assumptions are not intended to
forecast any possible future appreciation of the Company's stock or change in
dividend policy.
In addition to the options, the Company has outstanding warrants to
purchase up to 1.3 million shares of its common stock at $14.72 per share
through July 2000.
CHIGEN - In May 1997, the Company acquired all of the outstanding
Class A shares of Chigen by amalgamating Chigen with a wholly owned
subsidiary of the Company. As a result of this transaction, the Company
issued approximately 5 million shares of its common stock. As part of the
amalgamation, the Company also converted the outstanding options of the
Chigen stock option plan to AES stock options at the ratio of .29 to 1.
COMMON STOCK HELD BY SUBSIDIARIES - As of December 31, 1999,
approximately 15.8 million shares of the Company's common stock had been
issued to consolidated subsidiaries. These shares were issued as collateral
under various borrowing agreements and are not considered outstanding.
Therefore, they have been excluded from the calculation of earnings per share.
63
11. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for
income before extraordinary item. In the table below, Income represents the
numerator (in millions) and Shares represent the denominator (in millions):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------------------- ------------------------- -----------------------
$ PER $ PER $ PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
BASIC EPS
Income before extraordinary items $245 191.5 $ 1.28 $ 307 177.5 $ 1.73 $ 188 166.6 $ 1.13
EFFECT OF DILUTIVE SECURITIES:
Stock options and warrants - 4.5 (0.03) - 4.3 (0.04) - 4.4 (0.02)
Stock units allocated to deferred
compensation plans - 0.2 - - 0.3 - - 0.5 -
Tecons and other convertible debt,
net of tax - - - 9 6.9 (0.02) 10 6.3 -
----- ------ ------ ------ ------ ------- ------ ------ ------
DILUTED EARNINGS PER SHARE $245 196.2 $ 1.25 $ 316 189.0 $ 1.67 $ 198 177.8 $ 1.11
----- ------ ------ ------ ------ ------- ------ ------ ------
----- ------ ------ ------ ------ ------- ------ ------ ------
64
12. BUYOUT OF POWER SALES AGREEMENT
In October 1999, AES Placerita, a wholly owned subsidiary of the
Company, received proceeds of approximately $110 million to complete the
buyout of its long-term power sales agreement. In connection with the buyout,
the Company incurred transaction related costs of approximately $19 million.
The Company also recorded an impairment loss of approximately $62 million to
reduce the carrying value of the electric generation assets to their
estimated fair value after termination of the contract. The estimated fair
value was determined by an independent appraisal. Concurrent with the buyout
of the power sales contract, the Company extinguished certain liabilities
under the related project financing debt prior to their scheduled maturity.
As a result, the Company has recorded an extraordinary loss of approximately
$11 million, net of income tax of approximately $5 million.
13. INCOME TAXES
INCOME TAX PROVISION - The provision for income taxes consists of
the following (in millions):
FOR THE YEARS ENDED
---------------------------
1999 1998 1997
Federal:
Current $ 11 $ (9) $ 7
Deferred 36 61 22
State:
Current 3 3 19
Deferred 11 (5) (6)
Foreign:
Current 98 82 18
Deferred (48) 13 17
----- ----- ------
Total $111 $145 $ 77
----- ----- ------
----- ----- ------
The Company records its share of earnings of its equity investees on
a pre-tax basis. The Company's share of the investees' income taxes is
recorded in income tax expense.
EFFECTIVE AND STATUTORY RATE RECONCILIATION - A reconciliation of
the U.S. statutory Federal income tax rate to the Company's effective tax
rate as a percentage of income before taxes (after minority interest) is as
follows:
FOR THE YEARS ENDED
-----------------------
1999 1998 1997
Statutory Federal tax rate 35% 35% 35%
Change in valuation allowance - - (1)
State taxes, net of Federal tax benefit 4 (1) 3
Taxes on foreign earnings (6) (1) (7)
Other - net (2) (1) (1)
---- ---- ----
Effective tax rate 31% 32% 29%
---- ---- ----
---- ---- ----
DEFERRED INCOME TAXES - Deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
- -65-
amounts used for income tax purposes, and (b) operating loss and tax credit
carryforwards. These items are stated at the enacted tax rates that are
expected to be in effect when taxes are actually paid or recovered.
As of December 31, 1999, the Company had Federal net operating loss
carryforwards for tax purposes of approximately $95 million expiring from
2008 through 2019, Federal investment tax credit carryforwards for tax
purposes of approximately $48 million expiring in years 2002 through 2006,
and Federal alternative minimum tax credits of approximately $53 million that
carryforward without expiration. As of December 31, 1999, the Company had
foreign net operating loss carryforwards of approximately $428 million that
expire at various times beginning in 2001, and some of which carryforward
without expiration. The Company had state net operating loss carryforwards as
of December 31, 1999, of approximately $296 million expiring in years 2000
through 2019, and state tax credit carryforwards of approximately $12 million
expiring in years 2001 through 2009.
The valuation allowance increased by $9 million during 1999 to $42
million at December 31, 1999. This increase was the result of certain foreign
net operating loss carryforwards and state tax credits, the ultimate
realization of which is not known at this time. The Company believes that it
is more likely than not that the remaining deferred tax assets as shown below
will be realized.
Deferred tax assets and liabilities are as follows (in millions):
DECEMBER 31,
-----------------
1999 1998
Differences between book and tax basis of
property and total deferred tax liability $2,205 $469
------- ------
Operating loss carryforwards (180) (69)
Bad debt and other book provisions (168) (48)
Retirement costs (11) (26)
Tax credit carryforwards (96) (107)
Other deductible temporary differences (189) (55)
------- ------
Total gross deferred tax asset (644) (305)
Less: Valuation allowance 42 33
------- ------
Total net deferred tax asset (602) (272)
------- ------
Net deferred tax liability $1,603 $197
------- ------
------- ------
Undistributed earnings of certain foreign subsidiaries and
affiliates aggregated $438 million at December 31, 1999. The Company
considers these earnings to be indefinitely reinvested outside of the U.S.
and, accordingly, no U.S. deferred taxes have been recorded with respect to
such earnings. Should the earnings be remitted as dividends, the Company may
be subject to additional U.S. taxes, net of allowable foreign tax credits. It
is not practicable to estimate the amount of any additional taxes which may
be payable on the undistributed earnings. A deferred tax asset of $135
million has been recorded as of December 31, 1999 for the cumulative effects
of certain foreign currency translation losses.
Income from continuing operations before income taxes and
extraordinary items consisted of the following:
-66-
FOR THE YEARS ENDED
--------------------------
1999 1998 1997
United States $164 $211 $199
Non United States 192 241 66
---- ---- ----
Total $356 $452 $265
---- ---- ----
---- ---- ----
14. BENEFIT PLANS
PROFIT SHARING AND STOCK OWNERSHIP PLANS - The Company sponsors two
profit sharing and stock ownership plans, qualified under section 401 of the
Internal Revenue Code, which are available to eligible AES people. The plans
provide for Company matching contributions, other Company contributions at
the discretion of the Compensation Committee of the Board of Directors, and
discretionary tax deferred contributions from the participants. Participants
are fully vested in their own contributions and the Company's matching
contributions. Participants vest in other Company contributions over a
five-year period. Company contributions to the plans were approximately $7
million for the year ended December 31, 1999, and $5 million for the years
ended December 31, 1998 and 1997.
DEFERRED COMPENSATION PLANS - The Company sponsors a deferred
compensation plan under which directors of the Company may elect to have a
portion, or all, of their compensation deferred. The amounts allocated to
each participant's deferred compensation account may be converted into common
stock units. Upon termination or death of a participant, the Company is
required to distribute, under various methods, cash or the number of shares
of common stock accumulated within the participant's deferred compensation
account. Distribution of stock is to be made from common stock held in
treasury or from authorized but previously unissued shares. The plan
terminates and full distribution is required to be made to all participants
upon any change of control of the Company (as defined in the plan document).
In addition, the Company sponsors an executive officers' deferred
compensation plan. At the election of an executive officer, the Company will
establish an unfunded, nonqualified compensation arrangement for each officer
who chooses to terminate participation in the Company's profit sharing and
employee stock ownership plans. The participant may elect to forego payment
of any portion of his or her compensation and have an equal amount allocated
to a contribution account. In addition, the Company will credit the
participant's account with an amount equal to the Company's contributions
(both matching and profit sharing) that would have been made on such
officer's behalf if he or she had been a participant in the profit sharing
plan. The participant may elect to have all or a portion of the Company's
contributions converted into stock units. Dividends paid on common stock are
allocated to the participant's account in the form of stock units. The
participant's account balances are distributable upon termination of
employment or death.
The Company also sponsors a supplemental retirement plan covering
certain highly compensated AES people. The plan provides incremental profit
sharing and matching contributions to participants that would have been paid
to their accounts in the Company's profit sharing plan if it were not for
limitations imposed by income tax regulations. All contributions to the plan
are vested in the manner provided in the Company's profit sharing plan, and
once vested are nonforfeitable. The participant's account balances are
distributable upon termination of employment or death.
DEFINED BENEFIT PLANS - Certain of the Company's subsidiaries have
defined benefit pension plans covering substantially all of their respective
employees. Pension benefits are based on years of credited service, age of
the participant and average earnings. Clesa's pension plan was unfunded, but
it was substantially settled during 1999.
Upon acquisition of CILCORP in November 1999, AES assumed certain
obligations under the
- -67-
company's existing postretirement health care plan. Substantially all of
CILCORP's full-time employees are covered by the plan. The plan pays stated
percentages of most necessary medical expenses incurred by retirees, after
subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants become eligible for the benefits if
they retire from CILCORP after reaching age 55 with 10 or more years of
service.
Significant weighted average assumptions used in the calculation of
pension and other postretirement benefits expense and obligation are as
follows:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- ---------------
YEARS ENDED DECEMBER 31, 1999 1998 1999
Discount rates 8% 6% 8%
Rates of compensation increase 4% 2% N/A
Expected long-term rate of return on plan assets 9% 6% 9%
For measurement purposes, an increase in per capita costs of covered
health care benefits of approximately 7% was assumed for 2000. The rate was
assumed to decrease gradually to 5% for 2006 and remain level thereafter.
Net benefit cost for the years ended December 31, 1999 and 1998
includes the following components (in millions):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- ---------------
YEARS ENDED DECEMBER 31, 1999 1998 1999
Service cost $ 4 $2 $ -
Interest cost on projected benefit obligation 10 3 2
Expected return on plan assets 9 (1) (1)
--- --- ---
Net benefit cost $23 $4 $ 1
--- --- ---
--- --- ---
- -68-
The changes in the benefit obligation of the plans combined for the
years ended December 31, 1999 and 1998 are as follows (in millions):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1999 1998 1999
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 80 $ 72 $ -
Effect of foreign currency exchange rate change
on beginning balance (21) (5) -
Service cost 4 2 -
Interest cost 10 3 2
Plan participant contributions 2 - -
Actuarial (gain) loss (6) 6 (3)
Assumed in acquisitions 317 3 99
Benefits paid (10) (1) (2)
Settlement of benefits (3) - -
---- ---- ---
Benefit obligation as of December 31 $373 $ 80 $96
==== ==== ===
- -69-
The changes in the plan assets of the plans combined for the years
ended December 31, 1999 and 1998 are as follows (in millions):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1999 1998 1999
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 33 $ 31 $ -
Effect of foreign currency exchange rate change
on beginning balance (9) (2) -
Actual return on plan assets 58 3 5
Assumed in acquisitions 326 - 51
Employer contribution 3 2 1
Plan participant contributions 2 - -
Benefits paid (10) (1) (2)
---- ---- ---
Fair value of plan assets as of December 31 $403 $ 33 $55
==== ==== ===
The funded status of the plans combined for the years ended as of
December 31, 1999 and 1998 are as follows (in millions):
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1999 1998 1999
Funded status $ 30 $(47) $(41)
Unrecognized net actuarial (gain) loss (50) 5 (7)
---- ---- ----
Accrued benefit cost as of December 31 $(20) $(42) $(48)
==== ==== ====
All of the Company's pension plans have been aggregated in the table
above. Certain of the Company's plans at December 31, 1999, had benefit
obligations exceeding the fair value of these plans assets. As of December 31,
1999, the Company had plans with benefit obligations exceeding the fair value of
plan assets by approximately $30 million.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rate would have the following effects (in
millions):
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------------- ------------------
Effect on total of service and interest cost $ - $ -
components
Effect on postretirement benefit obligation 3 (4)
INVOLUNTARY SEVERANCE - During 1999, the Company has accrued $22
million for expected
- -70-
involuntary termination benefits for employees of companies acquired. There
are no significant unresolved issues that may result in a material adjustment
to this amount. Termination benefits of $14 million were charged against this
accrual during the year.
15. SEGMENTS
The Company operates in two business segments: generation and
distribution. Generation consists of the operation of electric power plants
and sales of electricity generally to electric utilities or regional electric
companies for further resale to end users. Distribution consists of
electricity sales to end users. The generation and distribution segments are
an aggregation of businesses acquired or constructed.
The accounting policies of the two business segments are the same as
those described in Note 1 - General and Summary of Significant Accounting
Policies. The Company uses gross margin to evaluate the performance of
generation and distribution businesses that it controls and consolidates.
Depreciation and amortization at the generation and distribution businesses
are included in the calculation of gross margin. Corporate depreciation and
amortization is reported within selling, general and administrative expenses
in the consolidated statements of operations. Pre-tax equity in earnings is
used to evaluate the performance of generation and distribution businesses
that are significantly influenced by the Company. Sales between generation
and distribution are accounted for at fair value as if the sales were to
third parties. All intersegment activity has been eliminated with respect to
revenue and gross margin. Information about the Company's operations and
assets by segment is as follows (in millions):
- -71-
PRE-TAX INVESTMENT
DEPRECIATION EQUITY IN AND
AND GROSS IN TOTAL ADVANCES PROPERTY
REVENUES(1) AMORTIZATION MARGIN EARNINGS ASSETS TO AFFILIATES ADDITIONS
Year Ended December 31, 1999
Generation $ 1,970 $ 180 $ 779 $ 52 $14,250 $ 524 $688
Distribution 1,283 97 225 (31) 6,351 1,051 146
Corporate - 1 - - 279 - -
------- ----- ------ ---- ------- ------ ----
Total $ 3,253 $ 278 $1,004 $ 21 $20,880 $1,575 $834
======= ===== ====== ==== ======= ====== ====
PRE-TAX INVESTMENT
DEPRECIATION EQUITY IN AND
AND GROSS IN TOTAL ADVANCES PROPERTY
REVENUES(1) AMORTIZATION MARGIN EARNINGS ASSETS TO AFFILIATES ADDITIONS
Year Ended December 31, 1998
Generation $ 1,413 $ 126 $ 576 $ 33 $ 5,682 $ 495 $369
Distribution 985 70 235 199 4,687 1,438 148
Corporate - - - - 412 - -
------- ----- ------ ---- ------- ------ ----
Total $ 2,398 $ 196 $ 811 $232 $10,781 $1,933 $517
======= ===== ====== ==== ======= ====== ====
- -72-
PRE-TAX INVESTMENT
DEPRECIATION EQUITY IN AND
AND GROSS IN TOTAL ADVANCES PROPERTY
REVENUES(1) AMORTIZATION MARGIN EARNINGS ASSETS TO AFFILIATES ADDITIONS
Year Ended December 31, 1997
Generation $ 1,110 $ 93 $ 390 $ 21 $ 4,404 $ 315 $483
Distribution 301 21 40 105 4,269 1,548 28
Corporate - - - - 236 - -
------- ----- ------ ---- ------- ------ ----
Total $ 1,411 $ 114 $ 430 $126 $ 8,909 $1,863 $511
======= ===== ====== ==== ======= ====== ====
(1) Intersegment revenues for the years ended December 31, 1999, 1998, and
1997 were $76 million, $69 million and $34 million, respectively.
- -73-
Revenues are recorded in the country in which they are earned and
assets are recorded in the country in which they are located. Information about
the Company's operations and long-lived assets by country are as follows (in
millions):
UNITED TOTAL
U.S. ARGENTINA BRAZIL HUNGARY PAKISTAN KINGDOM OTHER NON-U.S. TOTAL
REVENUES:
1999 $1,192 $ 452 $ 376 $ 212 $206 $ 207 $ 608 $ 2,061 $ 3,253
1998 655 423 478 227 213 40 362 1,743 2,398
1997 577 291 74 220 23 5 221 834 1,411
LONG LIVED
ASSETS:
1999 $4,221 $1,061 $2,588 $ 121 $492 $4,600 $1,375 $10,237 $14,458
1998 2,329 1,017 848 154 505 224 756 3,504 5,833
1997 1,424 587 875 172 490 190 536 2,850 4,274
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's assets and liabilities have
been determined using available market information. The estimates are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value of current financial assets, current financial
liabilities, and debt service reserves and other deposits, are estimated to be
equal to their reported carrying amounts. The fair value of project financing
debt, excluding capital leases, is estimated differently based upon the type of
loan. For variable rate loans, carrying value approximates fair value. For fixed
rate loans and preferred stock with mandatory redemption, the fair value is
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates. The fair value of interest rate swap, cap and floor
agreements and energy derivatives is the estimated net amount that the Company
would pay to terminate the agreements as of the balance sheet date. The
estimated fair values of certain notes and bonds included in project financing
debt, and certain of the other notes payable and Tecons are based on quoted
market prices. The carrying value of Rhinos approximates fair value as they
include a rate adjustment feature that is linked to the interbank market for
credit.
The estimated fair values of the Company's debt and derivative
financial instruments as of December 31, 1999 and 1998 are as follows (in
millions):
DECEMBER 31, DECEMBER 31,
1999 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Project financing debt $9,532 $9,499 $4,867 $4,847
Other notes payable 2,502 2,495 1,652 1,687
Tecons and Rhinos 1,318 1,770 550 657
Interest rate swaps - (23) - 101
Interest rate caps and floors, net - 13 - (5)
Preferred stock with mandatory redemption 22 20 - -
Energy Derivatives 4 4 - -
The fair value estimates presented herein are based on pertinent
information as of December 31, 1999 and 1998. The Company is not aware of any
factors that would significantly affect the estimated fair value amounts since
December 31, 1999.
- -74-
17. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
established standards for the accounting and reporting of derivative instruments
and hedging activities and will be adopted by the Company during fiscal year
2001. The Company is currently evaluating the impact of the adoption of SFAS No.
133.
18. QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly statements of
operations (in millions, except per share amounts):
QUARTER ENDED 1999
----------------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31
Revenues $ 638 $ 640 $ 847 $1,128
Gross margin 229 219 245 311
(Loss)/income before extraordinary items (13) 71 58 129
Extraordinary items, net of tax benefit - - - (17)
Net (loss) income (13) 71 58 112
Basic earnings per share:(1)
Before extraordinary items $(0.07) $ 0.37 $ 0.30 $ 0.63
Extraordinary items - - - (0.08)
------ ------ ------ -------
Basic (loss) earnings per share $(0.07) $ 0.37 $ 0.30 $ 0.55
====== ====== ====== =======
Diluted (loss) earnings per share:(1)
Before extraordinary items $(0.07) $ 0.36 $ 0.29 $ 0.60
Extraordinary items - - - (0.08)
------ ------ ------ -------
Diluted (loss) earnings per share $(0.07) $ 0.36 $ 0.29 $ 0.52
====== ====== ====== =======
QUARTER ENDED 1998
----------------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31
Revenues $ 575 $ 565 $ 612 $ 646
Gross margin 178 180 212 241
Income before extraordinary items 65 71 79 92
Extraordinary items, net of taxes - - 2 2
Net income 65 71 81 94
Basic earnings per share:
Before extraordinary items $ 0.37 $ 0.41 $ 0.44 $ 0.51
Extraordinary items - - 0.01 0.01
------ ------ ------ -------
Basic earnings per share $ 0.37 $ 0.41 $ 0.45 $ 0.52
====== ====== ====== =======
Diluted earnings per share:(1)
Before extraordinary items $ 0.37 $ 0.39 $ 0.43 $ 0.49
Extraordinary items - - 0.01 0.01
------ ------ ------ -------
Diluted earnings per share $ 0.37 $ 0.39 $ 0.44 $ 0.50
====== ====== ====== =======
(1) The sum of these amounts does not equal the annual amount because the
quarterly calculations are based on varying numbers of shares
outstanding.
- -75-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the information with respect to the ages of the Registrant's
directors in the table and the information contained under the caption
"Election of Directors" on pages 1 through 3, inclusive, of the Proxy
Statement for the Annual Meeting of Stockholders of the Registrant to be held
on April 18, 2000, which information is incorporated herein by reference. See
also the information with respect to executive officers of the Registrant
under the caption entitled "Executive Officers and Significant Employees of
the Registrant" in Item 1 of Part I hereof, which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See the information contained under the captions "Compensation of
Executive Officers" and "Compensation of Directors" on pages 6 and 11 through
14, inclusive, of the Proxy Statement for the Annual Meeting of Stockholders
of the Registrant to be held on April 18, 2000, which is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
See the information contained under the caption "Security Ownership of
Certain Beneficial Owners, Directors, and Executive Officers" contained in the
Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be
held on April 18, 2000 filed by the Company with the Securities and Exchange
Commission on March 22, 2000, which information is incorporated herein by
reference.
(b) SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS.
See the information contained under the caption "Security Ownership
of Certain Beneficial Owners, Directors, and Executive Officers" contained on
page 4 of the Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 18, 2000, which information is incorporated
herein by reference.
(c) CHANGES IN CONTROL.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information for Mr. Thomas I. Unterberg, a director of the
Registrant, contained under the caption "Election of Directors" contained in the
Proxy Statement for the Annual Meeting of
- -76-
Stockholders of the Registrant to be held on April 18, 2000 filed by the
Company with the Securities and Exchange Commission on March 22, 2000, which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(1) Financial Statements
- The following Consolidated Financial Statements of The AES
Corporation are filed under "Item 8. Financial Statements and
Supplementary Data."
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
- See Index to Financial Statement Schedules of the Registrant
and subsidiaries at page S-1 hereof, which index is
incorporated herein by reference.
(3) Exhibits
11 Statement of computation of earnings per share.
12 Statement of computation of ratio of earnings to fixed charges.
21 Significant subsidiaries of The AES Corporation.
23 Consent of Independent Auditors, Deloitte & Touche LLP.
24 Power of Attorney
27 Financial Data Schedule (Article 5).
(b) REPORTS ON FORM 8-K.
Registrant filed a Current Report on Form 8-K dated October 1, 1999
related to the acquisition by a subsidiary of the Registrant of 100%
of the common shares of CILCORP, Inc.
Registrant filed a Current Report on Form 8-K dated October 6, 1999
pertaining to certain litigation related to Registrant's investment
in CEMIG.
Registrant filed a Current Report on Form 8-K dated December 15,
1999 related to the acquisition by a subsidiary of the Registrant of
the assets of the Drax Power Station.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 2_, 2000 THE AES CORPORATION
(Company)
By: /s/ Dennis W. Bakke
-------------------
Name: Dennis W. Bakke
Title: President
- -77-
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* /s/ Roger W. Sant Chairman of the Board February 4, 2000
- -------------------
(Roger W. Sant)
/s/ Dennis W. Bakke President, Chief Executive Officer (principal
- ------------------- executive officer) and Director February 4, 2000
(Dennis W. Bakke)
* /s/ Hazel R. O'Leary Director February 4, 2000
- ----------------------
(Hazel R. O'Leary)
* /s/ Dr. Alice F. Emerson Director February 4, 2000
- --------------------------
(Dr. Alice F. Emerson)
* /s/ Robert F. Hemphill, Jr. Director February 4, 2000
- -----------------------------
(Robert F. Hemphill, Jr.)
* /s/ Frank Jungers Director February 4, 2000
- -------------------
(Frank Jungers)
* /s/ John H. McArthur Director February 4, 2000
- ----------------------
(John H. McArthur)
* /s/ Thomas I. Unterberg Director February 4, 2000
- -------------------------
(Thomas I. Unterberg)
* /s/ Robert H. Waterman, Jr. Director February 4, 2000
- -----------------------------
(Robert H. Waterman, Jr.)
/s/ Barry J. Sharp Senior Vice President and Chief Financial Officer
- ------------------ (principal financial and accounting officer) February 4, 2000
(Barry J. Sharp)
By: * /s/ William R. Luraschi February 4, 2000
---------------------------
Attorney-in-Fact
- -78-
THE AES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-6
Schedules other than those listed above are omitted as the information
is either not applicable, not required, or has been furnished in the financial
statements or notes thereto included in Item 8 hereof.
S-1
THE AES CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31,
------------
1999 1998
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 9 44
Accounts and notes receivable from subsidiaries 798 333
Deferred income taxes 4 -
Prepaid expenses and other current assets 20 69
---------- ----------
Total current assets 831 446
Investment in and advances to subsidiaries 5,558 3,431
Office Equipment
Cost 6 6
Accumulated depreciation (4) (4)
---------- ----------
Office equipment, net 2 2
Other Assets
Deferred financing costs (less accumulated amortization: 1999, $26, 1998, $18) 91 61
Project development costs 14 80
Deferred income taxes 58 39
Escrow deposits and other assets 24 21
---------- ----------
Total other assets 187 201
---------- ----------
TOTAL $ 6,578 $ 4,080
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1 7
Accrued and other liabilities 66 50
Revolving bank loan 335 8
---------- ----------
Total current liabilities 402 65
Long-term Liabilities:
Senior notes payable 948 425
Senior subordinated notes and debentures payable 1,069 1,069
Junior subordinated notes and debentures payable 1,476 700
Deferred income taxes 42 24
Other long-term liabilities 4 3
---------- ----------
Total long-term liabilities 3,539 2,221
Stockholders' Equity:
Preferred stock -- --
Common stock 2 2
Additional paid-in capital 2,617 1,243
Retained earnings 1,120 892
Accumulated other comprehensive loss (1,102) (343)
---------- ----------
Total stockholders' equity 2,637 1,794
---------- ----------
TOTAL $ 6,578 $ 4,080
========== ==========
See notes to Schedule I
S-2
THE AES CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED OPERATIONS
(IN MILLIONS)
For the Years Ended
December 31,
------------
1999 1998 1997
---- ---- ----
Revenues $ 20 $ 16 $ 22
Equity in earnings of subsidiaries 331 357 256
Cost of sales -- -- (5)
Selling, general and administrative expenses (44) (49) (36)
Interest expense, net (83) (48) (26)
--------- --------- --------
Income before income taxes and extraordinary item 224 276 211
Income tax (benefit) expense (4) (35) 23
--------- --------- --------
Income before extraordinary item 228 311 188
Extraordinary item - net loss on extinguishment of
debt (less applicable income tax benefit) -- -- 3
--------- --------- --------
Net income $ 228 $ 311 $ 185
========= ========= ========
See notes to Schedule I
S-3
THE AES CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED CASH FLOWS
(IN MILLIONS)
For the Years Ended
December 31,
------------
1999 1998 1997
---- ---- ----
Net cash (used in) provided by operating activities $ (252) $ 240 $ 122
INVESTING ACTIVITIES
Acquisitions (2,024) (556) (1,274)
Project development costs (26) (40) (3)
Investment in and advances to subsidiaries (622) (383) (410)
Escrow deposits and other (3) 33 1
-------- ---------- -----------
Net cash used in investing activities (2,675) (946) (1,686)
FINANCING ACTIVITIES
Repayments/borrowings under the revolver, net 102 206 (186)
Issuance of notes payable and other coupon bearing securities 1,524 350 1,536
Principal payments on notes payable -- -- (275)
Proceeds from issuance of common stock, net 1,305 200 502
Payments for deferred financing costs (39) (11) (13)
-------- ---------- -----------
Net cash provided by financing activities 2,892 745 1,564
(Decrease)/increase in cash and cash equivalents (35) 39 --
Cash and cash equivalents, beginning 44 5 5
-------- ---------- -----------
Cash and cash equivalents, ending $ 9 $ 44 $ 5
======== ========== ===========
See notes to Schedule I
S-4
THE AES CORPORATION
SCHEDULE I
NOTES TO SCHEDULE I
1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES
Accounting for Subsidiaries -- The AES Corporation has accounted for
the earnings of its subsidiaries on the equity method in the unconsolidated
condensed financial information.
Revenues -- Construction management fees earned by the parent from its
consolidated subsidiaries are eliminated.
Income Taxes -- The unconsolidated income tax expense or benefit
computed for the Company in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, reflects the tax assets and
liabilities of the Company on a stand alone basis and the effect of filing a
consolidated U.S. income tax return with certain other affiliated companies.
Accounts and Notes Receivable from Subsidiaries -- Such amounts have
been shown in current or long-term assets based on terms in agreements with
subsidiaries, but payment is dependent upon meeting conditions precedent in the
subsidiary loan agreements.
2. NOTES PAYABLE
First Call December 31
Date 1999 1998
---------- ---- ----
Senior Notes Payable:
Variable rate Corporate revolving bank loan due 2000 -- 335 233
Less: Current maturities (335) (8)
--------- ---------
Subtotal -- 225
8.00% Senior notes due 2008 2000 200 200
9.50% Senior notes due 2009 1999 750 --
Unamortized discount (2) --
--------- ---------
Total 948 425
========= =========
Senior Subordinated Notes and Debentures Payable:
10.25% Senior subordinated notes due 2006 2001 250 250
8.38% Senior subordinated notes due 2007 2002 325 325
8.50% Senior subordinated notes due 2007 2002 375 375
8.88% Senior subordinated debentures due 2027 2004 125 125
Unamortized discounts (6) (6)
--------- ---------
Total 1,069 1,069
========= =========
Junior Subordinated Notes and Debentures Payable:
4.50% Convertible junior subordinated notes due 2005 2001 150 150
5.38% Convertible junior subordinated debentures due 2027 2000 250 250
5.50% Convertible junior subordinated debentures due 2012 2000 300 300
6.75% Convertible junior subordinated debentures due 2029 2002 518 --
Variable rate Convertible junior subordinated debentures due 2007 1999 258 --
--------- ---------
Total 1,476 700
========= =========
All Notes Payable classified as long-term are repayable after 2004.
3. DIVIDENDS FROM SUBSIDIARIES AND AFFILIATES
Cash dividends received from consolidated subsidiaries and from
affiliates accounted for by the equity method were as follows (in millions):
1999 1998 1997
---- ---- ----
Subsidiaries 180 160 102
Affiliates 51 125 50
S-5
THE AES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
Additions Deductions
--------------------------- -------------------------
Balance at Charged to Balance at
Beginning Costs and Translation Amounts End of
of Period Expenses Acquisitions Adjustment Written Off Period
---------- ---------- ------------ ----------- ----------- ----------
Allowance for accounts receivables
Year ended December 31, 1997 20 17 -- -- -- 37
Year ended December 31, 1998 37 22 -- -- -- 59
Year ended December 31, 1999 59 8 68 (21) (10) 104
Balance at Charged to Balance at
Beginning Costs and Amounts End of
of Period Expenses Written Off Period
---------- ---------- ------------ -----------
Amortization of deferred costs
Year ended December 31, 1997 36 16 -- 52
Year ended December 31, 1998 52 25 (7) 70
Year ended December 31, 1999 70 27 (10) 87
S-6
EXHIBIT INDEX
Sequentially
Exhibit Description of Exhibit Numbered Page
- ------- ---------------------- -------------
11 Statement of computation of earnings per share.
12 Statement of computation of ratio of earnings to fixed charges.
21 Significant subsidiaries of The AES Corporation.
23 Consent of Independent Auditors, Deloitte & Touche LLP.
24 Power of Attorney.
27 Financial Data Schedule (Article 5).